Construction permits: despite a sharp rise, still failing to match demand for new housing

In mid-November, the Federal Statistical Office published new figures on permits for residential construction in Germany. They show that in the first three quarters of the current year permits rose by a considerable 24% to around 276,300 compared with the same period in the previous year. This is a positive development, as the shortage of properties is contributing to the rapid rise in property prices in many Germany conurbations.

Despite this, residential construction still lags demand for new housing. Should the current trends continue, we can count on 370,000 residential construction permits for 2016 as a whole. Completions are likely to increase by some 9% to 270,000 residential units, meaning that residential construction remains well below the figure of 400,000 homes per year, which are required according to property experts. The longer the trend persists, the greater the number of homes which will have to be built in the years to come in order to offset past shortfalls.

Under-investment in this area of the economy is certainly not attributable to a lack of demand for property. This is clear from the soaring prices, which already point to property markets overheating in various cities. Financing terms also remain exceptionally attractive: interest rates are extremely low. At the same time, banks are searching high and low for solid assets, which promise a better rate of return than bonds. The only bad news is the German Law on the Implementation of the EU Mortgage Credit Directive, which has been applicable in Germany since March and is restricting lending excessively, disadvantaging older people and young families in particular.

The causes for the chronic failure of construction completions to match demand for new housing are to be found on the supply side in particular: these include, primarily, a lack of land for construction, legal conditions, which prevent residential construction and make it far more expensive as well as temporary capacity bottlenecks in the construction industry. The key to rectifying under-investment in this area lies in local authorities that earmark and develop more land for construction close to towns, a relaxation of overblown construction rules and a borrower-friendly revision of the German version of the Mortgage Credit Directive. The measures would also contribute to cooling overheated property markets.

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