Economy and the Industry

Germany

Primarily due to a damper in production at the beginning of the year, the IfW Kiel (IfW) revised its forecast for the current year and now expects GDP growth of 2.0% in 2018 instead of 2.5%. Since the economic weakness at the beginning of the year resulted from causes that were more temporary in nature, production is expected to again accelerate over the remainder of the year. The IfW is thus standing by its GDP growth forecast of 2.3% for 2019. In its spring projection, the German federal government forecast economic growth of 2.3% for 2018 and 2.1% in 2019. According to the IfW, the German economy is again approaching its limit. While capacities are already being overutilized, production is growing more strongly than production potential. Given the continuation of the good situation in the labor market and high growth in the income of private households, private consumer spending can be expected to increase significantly. Impetus is also coming from the construction industry. Despite noticeable capacity bottlenecks and increasing construction prices, investments in construction can be expected to remain on an upward trend according to the IfW. The robust global economy is supporting exports. However, according to the IfW, despite the high capacity utilization being experienced by companies and the good business climate, corporate investments can be expected to grow only moderately since the fragile international political environment is having a negative effect. The unemployment rate is expected to drop back from 5.7% in 2017 to 5.2% in 2018 and 4.9% in 2019. The IfW also expects to see consumer price inflation of 2.0% in both 2018 and 2019, and substantial public-sector budget surpluses due to the economic situation. Exceptionally favorable financing conditions are to be expected over the entire forecast period. In June, the ECB decided to continue its bond purchases at the current level through the end of September 2018. After that, the scope will first be reduced and then the purchases will be discontinued at the end of 2018. The ECB’s Governing Council expects that ECB key interest rates will remain at their current level at least through the summer of 2019 and, in any case, as long as necessary. The interest rate for main refinancing operations of the ECB is currently 0.0%. Significant risks and uncertainties for the current economic situation and forecast come, among other things, from the foreign trade policy and security policy of the United States and from uncertainties in the European Union. In addition, according to the IfW, forecasts are marked by particular uncertainty as we approach an economic turning point.

Housing Market: Rent and Prices Expected to Rise Again in 2018

According to the analytic company bulwiengesa, the German real estate market continues to be in a good condition. The economic conditions remain favorable. The trend toward urbanization is drawing people into cities and the demand for new apartments is, in these areas in particular, above the level that the construction industry can produce every year. According to bulwiengesa, the high price momentum that has continued for years mainly reflects the high demand relative to supply with a concurrent lack of investment alternatives. Experts at DB Research assume that the goal of the German federal government of building 1.5 million new apartments during this legislative period will hardly be achieved. Obstacles for the construction industry such as a lack of land, a strict regulatory environment and high utilization of capacity may dampen new construction for years. At the same time, the demand for living space remains high. In light of the current economic conditions, DB Research expects prices and rents to continue to show a high level of development in the coming years. According to forecasts by DB Research, prices for apartments in the 126 largest cities in Germany can be expected to increase by an average of approximately 5% a year, and rents to increase by approximately 4% a year. At the same time, however, the risk of overvaluation is also increasing. Prices increased notably in the first few months of 2018 according to DB Research, albeit with significantly weaker momentum in comparison to the strong growth in rents and prices in 2017. According to the Association of German Pfandbrief Banks (vdp), increasing nominal interest rates can be expected to dampen demand for residential property overall, and the strong development of prices in the German real estate market can be expected to slow noticeably. According to Helaba, mortgage rates will increase only slowly in 2018, representing no real danger for the German housing market over the short term. A price correction is not expected in 2018 and is not likely in 2019, even though prices in cities are currently excessively high in the eyes of Deutsche Bundesbank. bulwiengesa also believes there will not be any large price corrections in the real estate market in the near future; the market is stable and a bubble is unlikely. The empirica bubble index for Germany surpassed the “zero threshold” for the first time in 13 years in the third quarter of 2017, as against the “bubble-free” reference year of 2004. As of the second quarter of 2018, the overall index is continuing to increase in both growth regions and shrinking regions. Rents and purchase prices in 265 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 17 districts. The bubble index indicates a medium to high risk for 211 districts. Residential property remains affordable according to DB Research, but this affordability will presumably decrease somewhat in 2018. There are also pronounced regional differences as far as affordability is concerned.

In addition to the overall goal of housing policy to build 1.5 million apartments, the new German federal government plans to introduce a housing subsidy for families with children as part of a housing initiative, with the intention of helping families purchase residential property, making the rent ceiling more transparent, limiting and simplifying the modernization allocation, and the subvention of new apartment construction through special depreciations.

Austria

Austria’s economy is in a period of economic boom and should continue to grow strongly according to the WIFO. The economy expanded by 3.0% in 2017, and the WIFO expects real GDP growth of 3.2% for 2018. Despite lively investment activity, the high level of utilization will likely continue to increase and the existing macroeconomic capacity bottlenecks will become more severe. According to WIFO, leading indicators point to the fact that the peak of the upswing has now been reached. For this reason, the economy can be expected to lose momentum and GDP to grow noticeably slower in 2019 at +2.2%. In its spring projection, the European Commission forecast economic growth of 2.8% for 2018 and 2.2% in 2019. According to WIFO, the growth is supported both by domestic demand – especially equipment investments and private consumption – and by foreign trade. At the same time, the expansion in exports can be expected to flatten somewhat during the forecast period in alignment with the world economy. The positive development on the labor market will likely continue, and the number of non-self-employed people in active employment will rise further. Labor supply can simultaneously be expected to increase noticeably, meaning that the reduction in unemployment will be rather subdued. Based on the national definition, the unemployment rate is expected to drop from 8.5% in 2017 to 7.6% in 2018 and 7.2% in 2019. The WIFO expects a rate of inflation of 2.0% in both 2018 and 2019.

According to the OeNB, the residential construction segment overcame a prolonged period of weakness in 2017, and the strong momentum in granting building permits points toward a further acceleration. According to CBRE, the dynamic population growth in metropolitan areas and the diminishing availability of land approved for construction will reinforce the trend toward more concentrated residential construction in the form of residential high-rise buildings. According to the RE/MAX Real Estate Future Index – which consolidates the expert opinions of around 560 real estate professionals throughout Austria – demand on the real estate market is expected to increase at a faster rate than supply in 2018. The prices for residential real estate are expected to continue to increase slightly in 2018. Purchase prices for apartments will show a more pronounced increase than rents. According to the real estate service provider EHL, the marked increase in new construction activity in Vienna is helping to stabilize the price level, which is therefore expected to remain consistently stable over the next few years. In 2018, rents in Vienna are expected to increase by around 1.5%, with purchase prices for properties in average locations expected to rise by between around 2.75% and 3%. The fundamental price indicator of the OeNB for residential real estate shows a slight increase in possible overvaluation for Vienna and Austria in the first quarter of 2018 compared with the previous quarter.

Sweden

Economic researchers at NIER estimate that the Swedish economy will peak this year. After economic growth of 2.3% in 2017, the NIER expects GDP growth at market prices of 2.4% in 2018 and 1.9% in 2019. Growth in domestic demand will soften in 2019, especially as a result of a decline in housing investment. GDP growth will then be bolstered by increasing demand for Swedish exports. However, according to the NIER, resource utilization in the overall economy will continue to decrease slightly. Given the ongoing significant shortage of workers with the desired skills, it also anticipates a further increase in the wage growth rate. The disposable income of households is expected to grow relatively quickly in 2018. The rapid rise in employment will slow down this year, which will result in a drop in unemployment from 6.7% in 2017 to 6.2% in 2018 and stay at this level in 2019. Measured against the consumer price index, the NIER expects an inflation rate of 1.8% (2.2%) in 2018 (2019). NIER experts also expect the Swedish Riksbank, the Swedish central bank, to wait until core inflation – as measured by the CPIF ex energy – increases to around 2% in spring 2019 before raising the repo rate.

Following the drop in home prices at the end of 2017, short-term indicators like the housing price indicator of financial services provider SEB point to stable or slightly increasing prices in the months ahead. According to the property consultancy company Pangea, the drop in prices had a significant impact on new construction. Existing old stock is less affected. While the SEB believes the probability of a soft landing for home prices has increased the short term, there are still uncertainties about the longer-term price trend, e.g., due to large-scale construction in major cities. Along with the risk of oversupply in some niches of the residential market, Pangea also mentions general risks from higher interest rates. According to Newsec, the housing shortage is not diminishing because a large number of the new apartments are built in a market segment that is too expensive. Consequently, many apartments have not been sold or rented at asking price because they are too expensive for the vast majority of the population. At the same time, the continuous population growth creates an immediate demand for living space. While SEB expects construction starts to decrease from 65,000 in 2017 to around 50,000 a year in 2018/2019, Sweden’s National Board of Housing, Building and Planning anticipates an annual construction demand of 93,000 units by 2020. CBRE believes the expected cooling or weakening of the residential property market could result in an increase in the supply of rental units, which in turn gives investors the opportunity to increase their exposure in this area. Furthermore, CBRE sees the rent-regulated housing market as remaining stable and a viable alternative to the bond market. Pangea reports that in the regulated rental housing market, large scale renovation schemes are lifting rents and it also expects rising interest from international buyers to invest in rental apartments and residential construction.