Development of the Economic Environment

Development of the Economy and the Industry


The German economy is continuing to experience a boom, although the experts at the IfW Kiel (IfW) recorded an economic slowdown at the beginning of the year. Expansion forces can, however, be expected to regain strength and carry the upswing beyond the year 2018. Economic momentum decreased notably in the first half of the current year. Gross domestic product (GDP) growth decreased in the first quarter of 2018 to 0.3%, and according to the IfW a strong increase in economic activity is again not to be expected in the second quarter of 2018 on account of subdued production figures and decreasing incoming industry orders. According to the IfW, overall economic production capacity was already very tense at the beginning of the year and capacity utilization in the manufacturing sector – already at a high level – eased in the second quarter of 2018 for the first time in two years. Nevertheless, the experts at the IfW do not believe that this means the limit of overutilization and the upper turning point in the economic cycle has been reached. Local absorption increased significantly, especially because private consumption and investment in construction again increased notably. Special effects on the side of production were also responsible for the decreases in production in the first quarter of 2018, and according to the IfW the economic climate has also cooled in other countries where capacity is less strongly utilized. The main causes of the lower economic momentum in Germany were obstacles to production and international business. Business expectations may have clouded overall, but based on information from the IfW, they correspond to assessments of the situation that are close to their historically high values. The situation on the labor market improved further. According to information supplied by the German Federal Statistical Office (Statistisches Bundesamt), the number of employed people rose in April and May 2018 by 37,000 each month when adjusted for seasonal work. Based on the information provided by the German Federal Employment Agency (Bundesagentur für Arbeit), the unemployment rate based on the total civilian labor force came to 5.0% in June 2018, down by 0.5 percentage points compared with the previous year. Compared with the same month a year earlier, the inflation rate as measured by the consumer price index was 1.6% in April, 2.2% in May and 2.1% in June. In May 2018, the European Central Bank (ECB) announced that it would stop its bond-buying program this year, and it continued to leave its key interest rate in the first half of 2018 at the record low of 0.0% where it has been since March 2016.

Rents and Prices for Apartments Continue to Increase – Sustained Dynamic Development in the Residential Investment Market

In the second quarter of 2018, home prices continued to rise, as the research and consulting institute empirica reported based on an analysis of their price database. Across Germany, the empirica real estate price index for average rents over all years of construction increased compared to the previous quarter by 0.8% (for new construction, the increase was also 0.8%). The increase in the quoted prices for condominiums was once again more pronounced. The price index for condominiums (all years of construction) increased compared to the previous quarter by 1.7% (new construction 1.9%). In several German cities, the purchase prices for residential real estate have experienced an unusually significant increase over recent years in relation to income and rents, and also compared to other large European cities, as reported by the International Monetary Fund (IMF) in its current country report on Germany. In these hot spots, prices are above the level that would be expected given the fundamental data, which points to an overvaluation, according to the IMF. In Germany overall, the development of residential real estate prices does not give cause for concern. According to the IMF, the causes of the price increases are increasing income, increased immigration and lower interest rates. In addition, supply remains limited by relatively strict provisions and increasing utilization in the construction sector. New housing policies intended to improve affordability should have no notable effects on prices, according to the IMF. According to DB Research, the price pressure can not be expected to ease for now. In 2017, the number of building permits was 350,000, while the number of completions was only 284,800. Given the low growth dynamic of completions over the past three years, DB Research expects that it will not be until 2022, when supply exceeds the yearly demand of at least 350,000 apartments, that the excess demand of what will then be significantly more than 1 million apartments will begin to gradually decrease.

In the first half of 2018, residential building bundles and residential developments of 50 units or more accounted for a total transaction volume of around € 10.6 billion in the German residential investment market, according to the real estate service provider CBRE. Compared to the previous year’s period, the transaction volume increased by 45%. According to CBRE, more and more existing portfolios are finding their way to portfolio holders pursuing a long-term approach, which is why product shortages continue to rise and interest in project developments, student apartments and microapartments continues to grow. These developments resulted overall in a further price increase compared to the previous year’s period. As far as 2018 as a whole is concerned, CBRE expects a transaction volume of approximately € 17.5 billion on the German residential real estate market.


In Austria, the economy also showed strong growth in the first quarter of 2018, as reported by the Austrian Institute of Economic Research (WIFO) in June 2018. GDP showed a quarter-on-quarter increase of 0.8% in seasonally adjusted terms (fourth quarter of 2017: 0.9%). The period of economic boom is thus continuing, according to the WIFO. Growth was driven in particular by domestic demand and foreign trade. According to the WIFO, the leading indicators continue to provide a positive outlook, even if the picture has become slightly less positive in recent months. A new acceleration of growth, however, is not to be expected in the coming quarters. The positive economic development is also manifest in the labor market. The number of non-self-employed people in active employment was 2.8% higher than in the previous year in May. Unemployment continued to decrease compared to the previous year. According to the WIFO, the seasonally adjusted unemployment rate based on the national definition was 7.7% in June. In the view of the WIFO, the price increase is still unusually restrained. According to Statistik Austria, the inflation rate as measured by the consumer price index was 1.8% in April, 1.9% in May and 2.0% in June.

The values of the DSS OeNB residential real estate price index – the price index of the Austrian central bank (OeNB) on the basis of new and used condominiums and single-family residences – show an increase in Austria in the first quarter of 2018 of 7.3% compared to the previous year’s period. In Vienna, prices increased compared to the previous year by 3.5%. In the rest of Austria, price development was significantly higher; excluding Vienna, the increase in Austria in the same period was 10.0%. According to the consumer price index, apartment rents (excluding ancillary costs) rose by 4.1% in Austria in the first quarter of 2018 compared to the previous year’s period. According to the OeNB, residential construction overcame a prolonged period of weakness in 2017 and showed increasing momentum in the last two quarters. Building permits point toward a further expansion. In the face of rising population figures and an increasing shortage of land, CBRE reports that (residential) high-rise buildings are becoming more of a focal point among developers and investors. According to the CBRE, the volume of investment in residential real estate amounted to € 550 million in 2017, which was significantly higher than in the previous year. The Austrian real estate investment market continues to be strong. According to EHL Real Estate, a volume of € 2.16 billion was traded in the first half of 2018; of this, 11% consist of institutional investments in the residential sector.


Sweden’s economy saw relatively strong growth in the first quarter of 2018 with a GDP increase of 0.7%, according to the National Institute of Economic Research (NIER). The institute also says that the economy has been operating above capacity since 2016, and the output gap widened further in the first quarter of this year. The vigorous growth was attributable to a number of temporary factors, such as high energy consumption due to cold weather. Exports of goods also stagnated in the first quarter of 2018, and recent data indicates that this weak performance continued in the second quarter of 2018. Along with falling housing investment, this will likely result in a slowdown of GDP growth to 0.3% in the second quarter of 2018 even though the NIER Economic Tendency Survey indicates a still stronger than normal business climate. Employment saw a strong increase in the first quarter of 2018. However, labor market indicators suggest lower employment growth in the second quarter of 2018. Seasonally adjusted and smoothed data shows an unemployment rate of 6.2% in June 2018. Compared with the same month a year earlier, the inflation rate as measured by the consumer price index was 1.7% in April, 1.9% in May and 2.1% in June.

Following the relatively sharp price increases in the Swedish housing market in recent years, home prices faltered in the fall of 2017 – as measured by the Valueguard HOX price index, which reflects the price development of typical condominiums and single-family homes – and fell in the last quarter of the year. In the view of NIER experts, however, the downturn is only temporary, and the macroeconomic effects are expected to be minor. Consistent with this, seasonally adjusted home prices remained stable during the first quarter of 2018, according to SEB (Skandinaviska Enskilda Banken) experts. Measured against the HOX, this stabilizing development continued in the second quarter of 2018, and in June 2018, the index was 0.5% higher than three months ago. The reasons for the cooling prices at the end of 2017 are probably due to higher mortgage restrictions and an increase in supply coming to the market. However, Newsec says the latter are often built in a market segment that is too expensive. According to SABO, the Swedish Association of Public Housing Companies, the housing market is under significant pressure. Much of Sweden is facing a housing shortage, primarily in its metropolitan regions. The population has seen strong growth in recent years and is expected to continue expanding rapidly. New construction has not been able to keep up with this population growth. In its most recent forecast of June 2018, the Swedish National Board of Housing, Building and Planning (Boverket) therefore expects an annual construction demand of 93,000 units by 2020.