German housing market: Slight decline in building permits in 2018; tighter regulation could worsen the situation

The shortage of housing is a key reason for the sharp rise in real estate prices and rents. This is unlikely to change all that quickly. For the number of building permits even fell minimally last year by 0.2% to 347,300 residential units. At first glance, this does not appear all that serious, given that the number of permits has not even fallen by 1,000 units. Moreover, the decline in permits for residential homes was particularly pronounced. On the other hand, the number of permits for houses and apartments has risen by 3,000 to 332,600 units.

Making this more problematic is the fact that the construction of new apartments is trailing behind, with completions grinding to a halt. Last year, around 300,000 units are expected to have been constructed, around 100,000 units less than the estimated annual demand for new construction. With capacities in the construction industry more or less fully utilized, there is little prospect of greater increases. To achieve considerably more completions, the labour-intensive construction sector needs more employees who, while desperately needed, are hardly available due to the good situation on the labour market. New construction is also being halted by increasing protests. This is being compounded by the strong population growth in many cities, which is exacerbating the shortage of housing there even more. As a result, the housing shortage is increasing from year to year. Over the past ten years, a gap of about 500,000 units has accumulated between apartments for which building permits have been granted and those actually built. This was joined by a further 50,000 in 2018, and a similar situation is expected in 2019.

Nevertheless, the development of building permits is also unsatisfactory. It symbolises the fact that the many obstacles to housing construction continue to exist, despite being known for a long time. These include, for example, the arduous process of demarcating building land, the lengthy approval procedures, the lack of progress in reducing the chaos of different building regulations throughout the country in conjunction with high and, by extension, expensive standards for housing construction and energy efficiency.

On the other hand, good progress is being made in the area of housing market regulation. In addition to the brake on rent increases, there are plans to further extend the rent level index from four to six years in order to dampen the increase in rents caused by the lack of housing supply. The possibility of passing on costs has been reduced from 11% to 8%. Other new developments are municipal environmental protection requirements, prohibitions on converting rented flats into owner-occupied flats or minimum requirements for the share of social housing in new construction projects.

The flood of regulation is likely to reduce the motivation of some investors to invest in the housing market. But this would only add to the problem of insufficient housing. The returns that can be generated with real estate have in any case fallen noticeably in response to the sharp rise in purchase prices. The high incidental costs for acquiring real estate do not make the situation any better. In this respect, there is little to be gained from making it more difficult to enhance the initially low rental returns through later rent increases. The Berlin initiative to expropriate large housing associations that are considered to be the reason for the high rents, is not conducive to easing the situation either. Even if this is unlikely to be realized, the very fact that this initiative meets with such huge support from the general public and from some policymakers has a deterring effect.

In any case, the only gradual expansion of supply will fail to bring relief to the housing market and will thus also fail to halt the rise in prices and rents.

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