Frozen German Real Estate Market... A New Trigger for Crisis?

Sharp Drop in New Construction Starts Amid Soaring Interest Rates

The real estate slump hitting the German economy, which is facing the risk of negative growth, is emerging as a potential trigger for an economic crisis.

On the 31st (local time), Bloomberg reported that amid the worsening manufacturing sector and the energy crisis stemming from Russia, the real estate downturn could become a critical flashpoint for the German economy.

German housing prices had risen significantly due to ultra-low interest rates following the 2008 global financial crisis, but they are now declining due to recent interest rate hikes. As of July, German housing prices have fallen 6.4% from their peak in June last year. While mortgage rates in Germany have surged rapidly, new housing supply has decreased due to rising raw material costs. Bloomberg warned, "Housing and commercial real estate development projects are collapsing one after another, and real estate companies are being pushed toward bankruptcy."

The government set an annual target of 400,000 new housing units, but with the construction sector cooling down, achieving even half of that goal is difficult. As raw material prices soar and a chill hits the housing market, construction companies are hesitant to start new housing projects. German real estate company Vonovia recently took the drastic step of halting all new construction. This decision was made because construction costs after groundbreaking are rising daily due to raw material price increases, while the high interest rates have led to the worst conditions in the sales market.

[Image source=EPA Yonhap News]

Bloomberg reported, "New housing starts in the first half of this year have halved, and the number of new housing permits, an indicator that can gauge future housing market trends, has also dropped by more than 25%."

Cases of construction projects being delayed or canceled are increasing due to the combined effects of high financing costs, rising construction costs from inflation, and policy uncertainties.

As concerns grow that the real estate market could worsen if the high interest rate environment persists longer, the German government has begun preparing countermeasures. The German coalition government recently introduced the ‘Growth Opportunities Act,’ which includes a corporate tax cut of 7 billion euros annually (approximately 10.9 trillion won) for small and medium-sized enterprises. The plan is to stimulate corporate investment through the corporate tax reduction to revive the economy. However, there are concerns that if the structural problem of the real estate market slowdown continues, the policy’s stimulus effect on the real economy will be limited. Bloomberg pointed out, "The real estate market, which accounts for 15% of the national economy, has served as a balancing force for the German economy until recently, but (with the crisis deepening) even this is now being shaken."