Expected Development of the Economy as a Whole and the Industry
According to the German Institute for Economic Research (DIW), the German economy has made a strong start to 2019. The economy is still growing and the research institutes continue to predict a sustained recovery, albeit with a slower pace of growth. They do not believe that a recession is on the cards given that the domestic economic forces appear to remain intact. While the Kiel Institute for the World Economy (IfW) and the German Institute for Economic Research (DIW) expect GDP to increase by 1.8% and 1.6% respectively in 2019, the ifo institute believes that the period of weakness triggered by the automotive industry and the manifold uncertainty surrounding the global economy are part of a longer-term trend and has made a more pronounced downward correction to its growth forecast for 2019, bringing it down to 1.1%, with the German federal government predicting growth to the tune of 1.0%. This means that the economy would appear to have reached the latter stage of the upswing, which has been ongoing for nine years now. Nevertheless, the general consensus is that the German economy is still in relatively good shape. The IfW expects to see considerable impetus again now that the production and supply problems affecting the automotive industry due to the transition to the new WLTP testing regime have been resolved and also thanks to the end of the low water levels that had hindered inland waterway transport and, as a result, logistical supplies and production.
Various fiscal measures that will provide a significant boost to household purchasing power came into force at the start of 2019, such as the reduction in the rate of contribution to unemployment insurance, the 50/50 financing of health insurance by employers and employees and the “mothers’ pension.” As a result, private consumption is likely to benefit from strong impetus. Industry is unlikely to be one of the main driving forces behind the economy as foreign sales markets are losing momentum and, in addition, many areas are operating at their capacity limit. This is also likely to result in a slowdown in job creation, also due to the short supply of labor. Those consumer-related sectors that are not export-oriented, on the other hand, including the construction industry and the trades segment in particular, still expect to achieve growth. The economic institutes expect inflation based on consumer prices of 2.1% (IfW)/2.2% (Ifo). The unemployment rate is expected to slip to below the 5.0% mark (IfW: 4.9%, Ifo: 4.8%).
The international trade conflicts are cause for concern. The disputes between the U.S. and China are already putting a damper on growth in the key Chinese economy. German exporters, automotive manufacturers and other investors will have to brace themselves for lower sales in China, one of their major export destinations. The trade dispute could also fuel a more rapid increase in inflation due to higher import prices. The situation is further exacerbated by the uncertainty surrounding Brexit. In the event of a “hard Brexit,” the reintroduction of customs duties and border controls would likely have a huge impact on the British economy and, as a result, on the eurozone. Italy’s debt policy also has the potential to usher in turbulent times on the financial markets, as the high risk premiums on Italian government bonds pose a risk to economic development. Although the ECB is not likely to implement an initial rate hike in 2019 in response to the weaker developments, it remains extremely vigilant.
Looking ahead to 2020, the IfW and the ifo insitute predict growth of 1.8%/1.6%, inflation based on consumer prices of 1.8%/2.0% and an unemployment rate of 4.7%/4.6%.
Housing Market: Rent and Prices Expected to Rise Again in 2019
The upswing on the real estate market is entering its tenth year, meaning that it has reached a mature phase, according to experts at Helaba Landesbank Hessen-Thüringen. Continued low interest rates and robust economic growth – Helaba predicts GDP growth of 1.5% in its outlook for 2019 – will keep the real estate sector in excellent order in 2019. According to Helaba, the increase in rents and purchase prices on the German residential property market is primarily due to the widening gap between supply and demand in the country’s conurbations in particular – a situation that is unlikely to change to any considerable degree in 2019. Experts from Deutsche Bank Research (DB Research) expect to see only a slight drop in price and rent momentum at the very most in 2019, with residential real estate prices once again likely to increase at a faster rate than consumer prices. The German Tenants’ Association (Deutscher Mieterbund) expects the standard local comparative rent to rise by between 3% and 5% in Germany’s cities in 2019. Bolstered by positive wage and income development, price developments are, according to DB Research, only likely to put a slight damper on demand, and even a further increase in the 5-to 10-year mortgage rates would only push demand down ever so slightly. While residential property remains affordable on the interest side of things according to DB Research, this affordability will presumably decrease further in 2019 and the market is characterized by considerable differences from region to region. Although a turnaround in interest rates appears to be a very likely prospect in 2019, Immobilienscout 24 does not expect to see an immediate turnaround in the price trend at a nationwide level. Rather, the property “supercycle” is expected to taper off slowly. The subdued growth in completed apartments will continue in 2019. DB Research expects 315,000 (Helaba 320,000) apartments to be completed in 2019 as against around 300,000 in 2018. This is likely to widen the gap between supply and demand even further. Based on the subdued growth momentum, DB Research does not expect the additional annual supply to exceed the additional annual demand for living space of at least 350,000 apartments until 2022. As DB Research believes that it will take a good few years for the real estate boom to reach the end of its cycle, the risk of a bubble forming in the current cycle has increased considerably. The IMF and Deutsche Bundesbank report that, following the dynamic increase witnessed over the last few years, prices for apartments in some German cities are above the level that would be expected given the fundamental data, which points to an overvaluation. The empirica bubble index for Germany had already surpassed the “zero threshold” back in the third quarter of 2017, as against the “bubble-free” reference year of 2004. The index as a whole increased further as against the prior-year quarter in the fourth quarter of 2018. Rents and purchase prices in 278 out of 402 administrative districts and self-governing cities are no longer developing in tandem. According to empirica, too many apartments are being built in 18 districts. The bubble index indicates a medium to high risk for 223 districts.
In addition to the overall housing policy goal to build 1.5 million apartments, the German federal government has planned, and in some cases already taken, various measures as part of a housing initiative. Whereas the housing subsidy for families with children was introduced in September 2018 and the German Tenancy Law Amendment Act (Mietrechtsanpassungsgesetz) came into force on January 1, 2019, the draft bill on the introduction of special write-downs for the construction of rented apartments had not yet been passed by the German upper house (Bundesrat) in December 2018. As far as the planned changes to real estate transfer tax in cases involving share deals are concerned, the finance ministers of the federal states have now, according to the Ministry of Finance of the federal state of Hesse, agreed on legislative texts that are to be included in the legislative procedure at federal level. The intention is to create greater hurdles for share deals. Other legislative projects that are relevant to the real estate sector and will be discussed in 2019, according to the German Association of Real Estate Consultants, Agents, Managers and Experts (IVD), include a reform of both the rent indices and the land tax system.
After exports and the domestic economy, driven by high consumer momentum and strong investment, resulted in the highest rate of GDP growth since 2011, at 2.7%, a slowdown in the pace of growth had already emerged in 2018. The Austrian economy is in the latter stage of a boom. In 2019, the Austrian Institute of Economic Research (WIFO) predicts slower, but still robust, economic growth of 2.0%, with GDP growth still tipped to come in at 1.8% in 2020. Bank Austria predicts lower economic growth of 1.9% in 2019 and 1.5% in 2020. Austria is countering the global slowdown and associated mounting demands for the export industry with solid domestic demand, in particular sustained strong private consumption, which will play a key role in cushioning the blow dealt by the unfavorable external factors influencing the domestic economy both this year and next. By contrast, investment growth is only likely to be moderate going forward. As the positive development on the labor market looks set to continue, the WIFO predicts a further drop in the unemployment rate, based on the national definition, to 7.3% in 2019 (Bank Austria: 7.5%) and 7.2% in 2020 (Bank Austria 7.5%). The WIFO predicts that inflation will stabilize at 2.0%. Austria is exposed to the same risks as those facing Germany, as described above. These include, in particular, the impact of the trade conflict between the US and China and the political uncertainty in the eurozone, such as the implications of Brexit and the global economic slowdown.
Overall conditions on the real estate market remain positive after 2018 was characterized by low interest rates, an ongoing good supply of properties despite a slight drop and very high demand for real estate among owner-occupiers and investors alike. Experts from the real estate service provider RE/MAX Austria do not expect to see any significant change in these conditions in 2019 either. According to the RE/MAX Real Estate Future Index – which consolidates the expert opinions of around 560 real estate professionals throughout Austria – the demand for real estate is expected to increase at a faster rate than supply in 2019, meaning that real estate prices will continue to increase slightly overall, although the rate of increase will be lower than in previous years. Apartment purchase prices are likely to increase at a faster rate than rents that can be freely agreed. The biggest increase in demand and prices is expected to relate to land to build on. The RE/MAX experts estimate that rents and prices for condominiums will continue to increase both in city centers and on the outskirts of cities, whereas the prices for condominiums in country municipalities will remain virtually unchanged and rents will falter. They describe the market for townhouses and apartment complexes as moving towards an equilibrium and expect to see price growth in this segment, too. According to the real estate service provider EHL, rents in Vienna are expected to increase by around 1.5% in 2019, with purchase prices for properties in average locations expected to rise by between around 2.75% and 4%. EHL believes that the Viennese residential property market will be hit by the new building regulations, e.g. including requirements relating to a higher proportion of subsidized apartments in cases in which areas are rezoned for residential development, and a judgment passed by the Austrian Supreme Court (OGH) on location surcharges. In the short and medium term, the impact on the supply of apartments will be a negative one, which could also put an end to the slight easing of the situation regarding apartment prices and rents. Looking at the residential investment market, EHL believes that demographic change – in particular the forecast of population growth – and the ongoing trend towards urbanization will result in the sort of long-term stable development that appeals to buyers that place particular emphasis on security, creating an extremely sustainable investment scenario. The fundamental price indicator of the OeNB for residential real estate shows a further increase in possible overvaluation for Vienna and Austria overall in the second quarter of 2018, compared with the previous quarter.
Economic researchers at NIER believe that the Swedish economy is currently in the midst of a slowdown. After predicted GDP growth of 1.9% in 2018, the NIER expects GDP growth at market prices of 1.4% in 2019 and 1.6% in 2020. Growth in domestic demand will soften in 2019, especially as a result of a sustained decline in housing investment. Swedbank takes a more positive view of expected economic growth in its outlook and expects to see growth of just under 2.0% in both 2019 and 2020. While real estate investment and private consumption will continue to slow, the outlook for public-sector investment remains fairly solid and the business climate still appears to be stable despite mounting uncertainty. Although the Swedish economy is close to its capacity limit, inflation and wage growth are still relatively subdued. Given the trend towards increasing protectionism, however, the export risks are increasing for Sweden, too, also due to growing uncertainty on the country’s main sales market, Europe, as a result of Brexit and Italy’s budget woes. The predicted population growth will increase the working-age population as well. As only low employment growth appears to be on the cards, unemployment is expected to increase slightly in 2019. NIER has also made a slight downward adjustment to its forecast for wage growth in 2019. The Swedish Riksbank is planning further rate hikes in steps of 0.5% – with the next increase to 0.25% scheduled for December 2019 and a further increase to 0.75% likely to come a year later. All in all, while the economy is expected to flatten out due to lower domestic demand, the drop in exports and the weak Swedish krona, a marked downturn does not appear to be likely.
There is still a housing shortage in most parts of the country. The National Board of Housing, Building and Planning’s 2018 Housing Market Survey reveals that 243 of Sweden’s 290 municipalities have a housing shortage and 195 municipalities also predict a shortage of housing in three years. According to Riksbank’s Business Survey (November 2018), property companies are reporting a strong market for both premises and rental housing. However, as regards sales of tenant-owned apartments, a clear decrease is visible and housing developers are being particularly impacted by the declining demand for newly produced tenant-owned apartments. According to the European Commission, it appears that the recent surge in construction activity may be overly skewed towards high-end developments including in some regional markets where end-user demand for such properties tends to be especially limited. As a result, there is a risk of oversupply in specific segments of the housing market, while a chronic shortage of affordable housing near major economic hubs remains. Sweden’s rental market is regulated with restrictions on rent increases, although rents can be increased if investments are made in measures to increase the standard of the properties. After housing investment climbed to historically high levels at the beginning of 2018, it is decreasing again. According to NIER, this is partly due to housing prices falling in late 2017 and early 2018. The drop in housing prices has meant that construction starts have fallen sharply, and housing investment is expected to decline in 2019. Meanwhile, Helaba expects residential real estate prices to stabilize due to the continued low interest rates and positive situation on the labor market. Despite the recent drops, the European Commission believes that some indicators point towards prices that remain above the level that appears justified based on the fundamental data. While CBRE reports that the growth outlook remains broadly positive, according to NIER there is a risk of further decreases in house prices. According to Swedbank, newly built condominiums for owner-occupiers are still under pressure in the metropolitan areas.