Development of the Economy and the Industry


With growth in gross domestic product (GDP) of 1.5%, the German economy experienced its ninth consecutive year of growth in 2018. The upswing did, however, start edging increasingly close to its limits and recently lost momentum after GDP contracted by 0.2% in the third quarter of the year – the first contraction seen since the beginning of 2015. Although, according to the Kiel Institute for the World Economy (IfW), the economy bounced back again in the fourth quarter of the year with GDP growth of 0.4%, GDP was, on the whole, weaker than expected in 2018.

The damper in the third quarter of the year was due primarily to the serious problems faced by the German automobile industry regarding the certification of new vehicles based on the new exhaust emissions test procedure, WLTP. High levels of macroeconomic capacity utilization along with supply chain delays, also due to low river water levels, and a severe shortage of labor also, however, stood in the way of the marked increase in production that had been predicted at the beginning of the year. This applies, in particular, to the construction industry. Although immigrant workers have increased the supply of labor, which is now scarce, and are making the biggest contribution to employment growth, the immigration figures are gradually starting to fall again and the employment potential remaining within the German population is limited.

What is more, the global trade conflicts and gradual global economic slowdown are starting to leave more of a mark. While the foreign trade balance showed a surplus at the end of the year, imports have been rising at a much faster rate since the start of the year than exports, which have lost momentum primarily due to the production losses in the automotive industry. Although the European sales markets would appear to have been the main culprits behind the export slump to date, the future development of the German economy is exposed, in this environment, to risks emanating from the latent protectionist tendencies of the U.S. government, problems in key emerging markets, concerns over a hard Brexit, a Chinese economic slowdown and political uncertainty in the eurozone. By contrast, corporate investment is proving robust – having received a boost from the capacity bottlenecks and favorable financing conditions – and contributed to growth, albeit with lower rates of growth than a year earlier.

The ifo business climate index slipped further to 101.0 points in December 2018, the lowest level seen in more than two years. Particularly in the service and manufacturing sectors, companies assessed the current situation as having deteriorated, whereas sentiment in the construction industry remained stable at a high level. It would appear that companies had started to feel more of an impact of the trade conflicts and associated deterioration in the export climate towards the turn of the year.

The positive trend on the labor market and income growth fueled brisk private consumer demand, which was one of the forces driving growth. The Federal Statistical Office reported an average of 562,000 more people employed in 2018 as a whole, up by 1.3% year-on-year. All in all, this marked the continuation of an increase in employment that has been ongoing for 13 years now. The German Federal Employment Agency (Bundesagentur für Arbeit) published an unemployment rate of 5.2% for 2018, down by 0.5 percentage points against the previous year. Consumer price performance has already been on a slight upward trajectory since the end of last year. In 2018, the average rate of inflation came in at 1.9% based on the consumer price index. Inflation was primarily driven by developments in the price of heating oil and fuel, although food prices and the prices of alcoholic drinks and tobacco products also increased significantly again.

Whereas the U.S. implemented an interest rate turnaround in its monetary policy some time ago, the European Central Bank (ECB) is still keeping the key interest rate at the record low of 0.0%, where it has been since March 2016, announcing that it would remain unchanged at least until the fall of 2019. By contrast, the ECB’s purchases of additional government and corporate bonds came to an end at the turn of 2018/2019.

Further Increase in Rent and Apartment Prices

Home prices continued to rise in 2018, 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 3.2% in the fourth quarter of 2018 compared to the previous year (for new construction, the increase was 2.9%). The increase in rent was, however, less pronounced than in 2017. The increase in the quoted prices for condominiums was once again more pronounced than the increase in rents. The price index for condominiums (all years of construction) increased by 9.0% during the same period (new construction 7.7%). Due to ongoing immigration, particularly from the European Union, and the very positive situation on the labor market, the demand for apartments (and offices) remains high, according to reports by Deutsche Bank Research (DB Research). According to a preliminary estimate released by the German Federal Statistical Office (Statistisches Bundesamt), the German population continued to grow in 2018. The situation on the residential property market is not tight across the board. According to the German Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR), growing cities and regions are experiencing significant growth in demand, together with housing shortages and rising rents and prices. On the other hand, other cities and, in many cases, rural regions in various parts of Germany are faced with a dwindling population. Given the supply bottlenecks, the slightly lower rental growth momentum in a year-on-year comparison is likely to be no more than a temporary blip, according to DB Research. DB Research expects 300,000 apartments to have been completed in 2018, while the annual demand for living space comes to at least 350,000 apartments. This means that the subdued growth in apartment completions is likely to have continued in 2018. 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 1 million apartments behind demand in total, particularly in the country’s large and very large cities. Since, according to DB Research, 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. In its country report on Germany, for example, the International Monetary Fund (IMF) reports that prices in some German cities are above the level that would be expected given the fundamental data, which points to an overvaluation. In these 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. According to DB Research, the price pressure can be expected not to ease for now, with the bottlenecks on the residential real estate market expected to drive further price increases in the future. In 2018, residential portfolios and complexes of 50 units or more accounted for a total transaction volume of around € 17.2 billion in the German residential investment market, according to the real estate service provider CBRE. Compared to the previous year, the transaction volume increased by 10%. Thanks to the promising macroeconomic fundamental data and the sustained low interest rates, CBRE reports that the German real estate market as a whole remains one of the most important target markets for domestic and foreign investors. According to BNP Paribas Real Estate (BNPPRE), project developments, which are in high demand both on the particularly tight real estate markets in A cities and in many smaller locations, but also the asset class comprising student apartments and “microapartments” have been gaining in popularity for some years now.

As part of a housing initiative, the German federal government reached an agreement in 2018 on the implementation of a number of housing policy measures to promote more housing, affordable rents and residential property ownership. The housing subsidy for families with children, which aims to offer support to families looking to buy residential property, was already introduced in September 2018. The German Tenancy Law Amendment Act (Mietrechtsanpassungsgesetz), which is designed to ensure greater transparency with regard to the rent ceiling and to limit and simplify the modernization allocation, came into force on January 1, 2019.


The Austrian economy is in the latter stage of a marked economic upswing. Bolstered by strong domestic demand and solid export performance, real GDP growth will come in at 2.7% according to the Austrian Institute of Economic Research (WIFO), on a par with the previous year and significantly outperforming the eurozone average. The current boom is being driven by industrial production, as well as by construction and services, in particular. The ongoing positive economic development is also reflected in the labor market: Job vacancies and employment are expanding at a rapid rate, with the unemployment rate falling below the 8% threshold (as a percentage of the workforce excluding the self-employed), namely to 7.7%, for the first time since 2013. According to the WIFO, inflation is still unusually restrained and is comparable to the prior-year level. The Austrian Economic Chambers (WKO) are reporting a rate of inflation, based on the consumer price index, averaging 2.0% year-on-year in 2018.

Given that the overall conditions remain very positive for the Austrian real estate market, the demand for real estate remains high, according to experts from Bank Austria. Thanks to strong population growth and accelerated by the boom in the demand for investment properties, residential real estate prices have increased considerably in recent years. The values of the current 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 third quarter of 2018 of 8.0% compared to the previous year’s period. In Vienna, prices increased compared to the previous year by 6.5%. In the rest of Austria, price development was higher; excluding Vienna, the increase in Austria in the same period was 9.7%. According to the consumer price index published by the Austrian statistical office, Statistik Austria, apartment rents rose by 3.7% in 2018 compared with 2017. The OeNB reports that the residential construction segment overcame a prolonged period of weakness in 2017, making further gains in the first half of 2018. Production in the building construction segment was up by 7.6% in a year-on-year comparison and the development in building permits points towards a further acceleration in residential construction activity. Bank Austria expects more than 62,000 new apartments to have been built in Austria in 2018. Although this would reduce the existing excess demand on the Austrian residential property market, it would not close all supply gaps at regional level – particularly not in the country’s conurbations. According to CBRE, the amendment to the Viennese building regulations is likely to considerably reduce the supply of newly built privately financed residential properties in the medium term. The real estate service provider EHL reports that construction costs and the price of land are increasing considerably. According to its figures, transactions accounting for a total volume of around € 4 billion were executed on the Austrian real estate investment market in 2018. 20% of these investments relate to institutional residential investments. EHL considers the Austrian market to still be attractive to national and international investors alike, pointing to a good level of acceptance for the current price levels despite a drop in yields.


After the Swedish economy faltered in the third quarter of 2018, with GDP down by 0.2%, GDP is expected to have bounced back again in the fourth quarter of 2018 – largely thanks to a recovery in consumption among private households – with growth of 0.6%, according to the National Institute of Economic Research (NIER). A decline in residential property investments and a temporary drop in private consumption were the main factors behind the temporary slump. The sale of new cars alone plummeted as a temporary result of the new bonus-malus system for road tax that came into force in July 2018 in an attempt to boost the proportion of low-emission cars. GDP growth is tipped to come in at 1.9% for 2019 as a whole. Most indicators suggest that the economy reached its peak in 2018. Both the consumer and business climate indicators on economic development have fallen in recent months. The demand for labor, however, remains brisk as employment levels continue to increase. The foreign trade balance remains positive, in particular due to a drop in imports. As Sweden exports around three-quarters of its goods to other EU countries, the slowdown in European economic growth is having a direct impact on Swedish exports. Capital investment has also made a positive contribution to GDP, whereas the growth in residential construction investment has slowed slightly. Seasonally adjusted and smoothed data shows an unemployment rate of 6.2% in December 2018. Compared with the same month a year earlier, the inflation rate as measured by the consumer price index came to 2.0%. This prompted the Swedish Central Bank – for the first time in seven years – to raise its key interest rate in December, lifting it by 0.25 percentage points to -0.25% now that the inflation target of around 2.0% has been reached.

In the meantime, the wait for a new government is over: now, more than four months after the election, a minority government consisting of Social Democrats and the Green Party has been running the country since January 2019.

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 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. In this environment, the increases on the Swedish rental housing market continued. According to data supplied by Statistics Sweden, rents rose by an average of 1.1% in 2018, as against 0.8% in 2017. By contrast, prices on the market for residential property ownership came under pressure at the end of 2017. Stricter mortgage rules governing real estate financing – in response to the high levels of household debt accumulated during the real estate boom – contributed to a downward price trend which, according to the European Commission, was driven mainly by weakness in the tenant-owned apartment (“Bostadsrätt”) market. The term “tenant-owned apartments” refers to the cooperative property ownership of apartment buildings that is common in Sweden. Each resident owns a share in the overall building together with a legal right to occupy a specific residential unit. While house prices have stabilized in the country as a whole, new build owner-occupied flats are still under pressure in the metropolitan areas, according to Swedbank. Although the Valueguard HOX price index, which reflects the price development of typical condominiums and single-family homes, was up by 2.0% year-on-year in December 2018, it is important to remember, when drawing comparisons with December 2017, that the housing market had reached a low point following a slump in the fall of the same year. In addition to higher mortgage restrictions, the increase in the supply of new homes coming on to the market is also likely to have contributed to the cooling prices. However, Newsec says that these homes are often being built in a market segment that is too expensive. According to SABO, the Swedish construction market is suffering from very high prices. After several years of brisk construction activity, home construction started to slow down in 2018. Due to the falling prices and the high supply of expensive tenant-owned apartments, SEB expects construction starts in 2018 to have dropped to 57,000 (2017: 65,000). Savills is still reporting keen interest in real estate investments in Sweden. The volume of investment on the transaction market came to SEK 159 billion in 2018 (+ SEK 5 billion year-on-year). With a total investment volume of SEK 51.5 billion, residential real estate accounted for around one-third of the transaction volume, with growing interest in Swedish residential real estate among foreign investors.