The construction industry in Germany recorded a fall in activity for the first time in more than a decade. This is because several construction companies in the German economy are scaling back their building activities, as a result of the coronavirus pandemic. As per Federal Statistical Office (Destatis), construction industry turnover in January 2021 fell by 15.6% YoY.
However, despite a small dip at the beginning of COVID-19, the residential sector remained stable with trading volume of institutional investment following the pre-COVID 19 levels and prices continuing to remain high. Demand for the residential construction sector remained strong in the German market, owing to low mortgage interest rates.
According to ConsTrack360's Q4 2020 Global Construction Survey, residential construction industry in Germany is expected to grow by 15.6% to reach EUR 118,324 million in 2021. The construction industry in Germany is expected to continue over the forecast period, recording a CAGR of 5.2% during 2021-2025. The construction output in the country is expected to reach EUR 167,455 million by 2025.
In 2020, transaction volume stood at €21.7 billion (approximately 164,500 units) with German commercial market for residential property investments recording the second highest transaction volume since 2005. The investment volume stood at €5.2 billion (around 33,100 units) which was significantly greater than in both previous quarters (+53% above their combined average).
As demand outstripped supply and availability of cheap mortgage rate, the prices of residential property in Germany rose. In Q4’20, residential property prices rose by 8.1% YoY, as per Destatis. Despite the COVID-19 pandemic impact, the trend of increasing property prices continued, with increase in Q4’20 the strongest since Q4’16.
The supply of houses has been lagging behind demand owing to rising construction and land prices, housing policy interventions and a shortage of land in urban areas. Germany lacks around 670,000 apartments nationwide. Owing to the low supply, the federal, state and local governments followed various measures including offering billion euros for social housing construction and tax incentives for the construction of rental apartments, with an aim to build 1.5 million new homes by fall 2021.
Due to lack of supply and increasing housing costs, the population influx into the major cities has been falling for some time now, and this has been even further intensified by the COVID-19 movement restrictions. Moreover, the increasing work from home trend and the savings in commuting costs have caused the catchment area around the regional labor and residential markets to widen, which has mainly benefitted suburban areas around the top cities.
Moreover, the prices for single-family and two-family houses also increased significantly. Additionally, housing prices surged by 12.1% YoY in Q4’20 in Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Duesseldorf, the largest cities in the country.
Furthermore, prices of owner-occupied apartments continued to increase in urban and rural areas. Also, condominiums recorded the highest price increase of 8.9% in more densely populated rural counties.
As housing remains a basic need for people, federal and state governments have taken several initiatives to support tenants. These include elimination of termination due to rent debts for a period of three months, which also includes delays in gas, electricity and telephone bill payments. Also, due to stagnant income and significant decline in immigration, the excess demand for housing has eased for the time being.
With continuous key interest rate cuts over recent decades, mortgage interest rates in Germany also fell considerably reaching a low of 1.95% in 2018, making it favorable for both institutional and private investors on the financing side of residential property investments.
Owing to favorable financing level, the share of mortgage loans with long-term fixed interest rates has also increased in the recent years. While the share of housing loans with a term of more than ten years was below 20% around twenty years ago, these loans now account for almost half of all mortgage loans.
While the population is expected to decline from 2021 onwards, according to Federal Statistical Office estimations, the number of households is expected to grow to around 43.2 million (+5.9% by 2015) by 2035. Owing to this, a steady rise in demand for housing can be expected in Germany until at least 2035 due to higher household numbers.
In January 2021, the construction of a total of 27,654 dwellings was permitted in Germany. Also, as per Destatis there was a rise of 5.1% in seasonally and calendar adjusted terms QoQ in January 2021. From January to December 2020, construction of a total of 368,400 dwellings (residential and non-residential) was permitted in Germany, an increase of 2.2% or 7,900 dwellings over 2019.
