Half-Year Report 2019

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According to the Kiel Institute for the World Economy (IfW), economic performance showed solid development in the first quarter of 2019 with growth in gross domestic product (GDP) of 0.4%. The increase is primarily due to increased private consumer spending. Overall, however, the picture for the economy remains inconsistent according to the Institute for Economic Research (ifo). The export-oriented manufacturing sector, which generates about one quarter of value creation, is subject to the current trade conflicts, while the service sector is able to record moderate growth, and the construction sector robust growth. The underlying economic trend is also apparent in the sentiment indicators. In June, the ifo business climate index reached a level of 97.4 points, the lowest value seen since November 2014. Employment continues to increase, though at a slower rate. According to the Federal Statistical Office (Destatis), the number of people employed increased in May by 468,000 compared with May 2018, which only indicates a gain of 1.0%. The unemployment rate of 4.9% for June as published by the German Federal Employment Agency (Bundesagentur für Arbeit) decreased compared to the prior-year period by only 0.1 percentage points. Destatis reported a 1.6% year-on-year increase in the rate of inflation in Germany – as measured by the consumer price index – in June 2019. The European Central Bank (ECB) is sticking to its expansive monetary policy. The main refinancing rate has been at an all-time low of 0.0% since March 2016. According to the ECB’s Governing Council, European key rates will remain at their current low level throughout the first half of 2020 at the very least in order to take account of the inflation target of below, but close to, 2%.

All in all, the German Federal Ministry of Economic Affairs and Energy (BMWi) expects that macroeconomic output will have dipped slightly in the second quarter with the two-track course of development continuing. However, the export-oriented industrial sectors should switch back to a moderate expansion course starting in the second half of the year. The intact domestic economic drivers could once again have a stronger impact. In particular, private consumption will increase against the backdrop of further income growth. Construction investment will also remain on an upward trajectory, although this is expected to be associated with a further marked increase in construction prices. Nevertheless, some economic research institutes made downward adjustments to their forecasts in June. The IfW and the ifo institute predict GDP growth of 0.6% for 2019 (spring forecast: 1.0%) and a growth rate for 2020 of 1.6% and 1.7%, respectively. The German federal government has also lowered its forecast, predicting growth of 0.5% for 2019 (2020: 1.5%). Consumer prices are expected to rise by an average of 1.5% in the course of the year, accelerating to an increase of 1.8% in 2020 in line with the improved economic conditions. The risks hanging over global economic development remain dominated by the trade conflict between the US and China, with an escalation looking increasingly likely after the trade talks failed. Weak global trade hits German industry particularly hard due to its strong international links. In addition, the United Kingdom’s plans to leave the European Union also constitute a risk as far as the forecast is concerned. The budget situation in Italy is another source of uncertainty. If the dispute with the European Commission flares up again, this could have a negative impact on Italy’s economic momentum, which is already weak to begin with, with a knock-on effect on the euro area.

Demand for Homes Remains High, Housing Policy Becoming Increasingly Important

According to Deutsche Bank Research (DB Research), the nationwide imbalance between the demand for, and the supply of, housing is once again unlikely to change to any considerable degree this year. The population is currently growing due to net migration, a trend that is expected to continue for some years to come. Beyond that, the demand for homes should remain high due to the very positive situation on the labor market and the low interest rates. At the same time, the supply elasticity will probably remain low, according to DB Research. The housing markets are not, however, tense across the board. Growing cities and regions are experiencing significant growth in demand, together with housing shortages, according to the German Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR). At the same time, other cities and in many cases rural regions are faced with a dwindling population. In the first half of 2019, home prices continued to rise overall, 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 by 3.6% in the second quarter of 2019 compared to the same quarter of the previous year (for new construction, the increase was 3.1%). While experts from F+B confirm that quoted rents in the second quarter of 2019 were up on the prior-year quarter, they witnessed a trend toward a slight drop/stagnation in quoted rents in the first half of the year. At the same time, however, rents under existing rental contracts are still on the rise. The increase in the quoted prices for condominiums was once again more pronounced than the increase in rents. The empirica price index for condominiums (all years of construction) increased by 9.4% in the second quarter of 2019 compared to the prior-year quarter (new construction 7.0%). Experts from DB Research expect prices and rents to increase in 2019, with lower rental yields as a result, although the price momentum is likely to slow slightly in a year-on-year comparison. 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. The National Association of German Cooperative Banks (BVR) estimates that the prices for owner-occupied residential property will increase by around 5.5%, looking at all of Germany’s administrative districts on average.

Construction activity is still lagging behind the demand for housing. According to Destatis, 285,900 apartments were completed in Germany in 2018, a figure that was up by only 0.4% as against the previous year. According to DB Research, there is an annual demand for housing of at least 350,000 apartments. A lack of land available for construction and the increasingly pressing shortage of skilled workers are expected to stand in the way of any rapid increase in completions. Supply is now lagging more than one million apartments behind demand in total, particularly in the country’s large and very large cities. According to DB Research, the additional annual supply should only exceed the additional annual demand for living space in 2022. Since it will take a good few years for the real estate boom to reach the end of its cycle, DB Research believes that the risk of a bubble forming in the current cycle has increased considerably. The empirica bubble index for Germany shows a moderate to high risk for 229 out of 401 administrative districts and self-governing cities.

Investor demand for residential real estate in Germany is likely to remain high, in particular among risk-averse German investors. The planned rent freeze (Mietendeckel) could put a damper on the investment climate in Berlin.

Given the shortage of housing and rising rents and prices, housing policy is becoming one of the most pressing issues on the political agenda. The German Tenancy Law Amendment Act (Mietrechtsanpassungsgesetz), which is designed to ensure greater transparency with regard to the rent cap and to limit and simplify the modernization allocation, has been in force since January 1, 2019. The draft bill on the introduction of a special depreciation for the construction of rental apartments was passed by the German Bundesrat in June 2019. Further legislation under discussion with relevance for the real estate sector includes the stepping up of rent cap regulations, which is supposed to be extended beyond 2020 by a period of five years; an intended amendment to the German real estate transfer tax system that aims to make share deals less attractive; and the planned Berlin-specific five-year rent freeze.