German Real Estate in 2023
While a lot of people are talking about a real estate bubble, we compiled 6 reasons why property prices in Germany have been rising & why they will continue to rise in 2023.
- Germany has failed for decades to produce enough living space. There is a huge backlog of construction that is needed.
- Inflation of construction prices is a lot higher than regular inflation, making it more expensive to build properties.
- The construction cancellation index from the IFO Institute increased significantly. Fewer constructions, less supply of properties.
- The German population is at an all-time high and continues to increase. All while the supply of flats continues to go down.
- The Alliance For Affordable Housing introduced 187 measures to normalize rents and property prices. Will that help?
- Until the German government allows supply & demand in the German real estate market, the housing problem will get worse.
6 Reasons For Rising Property Prices in 2023
Over the last +10 years, the German real estate market has been booming! Property prices in Germany have never been as high as they were in 2021. In 2022, the property market in Germany cooled down quite a bit, begging the question – What’s going to happen to German real estate in 2023? 🤔
If you think the entire real estate market will tank (like the World Bank) and the real estate bubble will burst (like the Swiss Bank UBS), you may be over-speculating. In this article of the GermanReal.Estate blog we will give you 6 reasons why we think property prices in Germany will rise in 2023.
Reason 1 For Rising Property Prices: Construction Backlog
Germany wants, and Germany needs, 400.000 new flats every single year to satisfy the current demand for living space. At least, that’s the number the government published earlier this year, claiming that this is the most important goal the government has in order to normalize the exploding rents over the last few years.
It’s great that the government is setting this goal, but if we look at the data over the last 20 years, this goal has never been met. In fact, Germany achieved 300.000 new flats in a year only once.
Germany is missing hundreds of thousands, if not millions of flats, to satisfy the demand for housing. Projections are that we will not manage to construct 300.000 flats in 2023 either.
Increased competition between buyers for the insufficient housing supply is one reason prices are not likely to fall.
Reason 2 For Rising Property Prices: Construction Price Inflation
Another reason we’re not likely to see 300.000 new flats in Germany this year is due to the impact of inflation on construction prices (and remember that we actually need 400.000 new flats to satisfy the demand for living space). Projections are that only between 200.000 and 250.000 flats are likely to be built this year.
Germany has entered a period of high inflation, and everything has become more expensive over the last few months. But what about construction prices?
The last official numbers from the Federal Statistical Office show that construction inflation is much higher than regular inflation. While the overall inflation is currently around 10%, construction prices have risen by as much as 16,9%.
Especially wood and steel prices have risen almost 30% compared to last year!
When the costs to build new properties, or to renovate existing properties, increase by 16,9%, it is unlikely that property prices will fall.
Property prices in Germany have increased a lot in the last +10 years for various reasons. In 2023, most of these reasons got “worse” – driving up property prices even more than before. Invest in German real estate here:
Reason 3 For Rising Property Prices: Canceled Constructions
New construction projects here in Germany are getting canceled left and right. FiveRocks (property developer from our first 2 real estate security tokens in Mönchengladbach and Willich) has solid calculations and risk management which is why we continue to work with them and help them fund their projects by offering you a stake in their development projects.
But not every property developer is doing as well as FiveRocks right now. Increased costs to build because of inflation, and higher financing costs due to rising interest rates, are wiping out a significant number of property developers.
The IFO Institute publishes a construction cancellation index every month showing how severe the issue really is. In August 2022 the cancellation rate of property developments was 11,6%. In September 2022, it was at 16,7%. Staggering numbers!
We can guess what this means! Each canceled construction project today is the property price increase of tomorrow.
Reason 4 For Rising Property Prices: Population Growth
To make things even worse from a property supply and demand perspective, the German population has been growing and is continuing to grow. Just satisfying the demand for living space today won’t cut it in the future. The German population is at an all-time high of over 83 million people, and the number is rising due to net migration.
In 2021, about 1 million people moved out of Germany, but about 1,3 million people moved to Germany. A net population increase of about 300.000 people. But those numbers are nothing compared to this year and next year.
The Federal Office for Migration has published figures that so far in 2022 more than 1 million people migrated from Ukraine alone. This is not total migration to Germany just migration from Ukraine.
Some projections say that another 1,4 million people might migrate from Ukraine to Germany in 2023. All these people migrating to Germany need to live somewhere!
If we’re not constructing enough properties to satisfy the demand from the existing population, and more people continue to migrate to German, how can we expect property prices to fall over the long term?
The supply of living space in Germany continues to go down while the population continues to increase. Help the German real estate industry to construct more properties and profit at the same time by investing here:
Reason 5 For Rising Property Prices: Increased Bureaucracy
The first 4 reasons why property prices will continue to rise in 2023 are no secret. At the same time, everybody who rents or wants to buy a property knows that buying prices and rent prices have gone through the roof in the last +10 years. A good question to ask is what the German government is doing to address the issue. 🤔
That gives us the fifth reason for increasing property prices in 2023: Increased bureaucracy. Below you can see our Chancellor Olaf Scholz, together with the German Building Minister Klara Geywitz introducing the Alliance for Affordable Housing. We hoped it can help to address the problems facing the inhabitants of Germany but so far, all they have done so far is have meetings and waste our hard-earned tax money in the process.
That is at least their side of the story. If you look at the measures, it becomes quite obvious that they will not solve our housing problem. All the measures do is introduce more bureaucracy for climate reasons or social reasons.
These are important issues, but the solution the government proposes is no solution. Increased bureaucracy will further decrease investments in the real estate industry.
Reason 6 For Rising Property Prices: No Market Economics
This brings us to the sixth and last reason why property prices will rise in 2023: The German government tries to solve issues that only the market can resolve with simple economic principles. The law of supply and demand has been proven right, over and over again, for hundreds of years.
This simple economic principle has led to the great world that we are living in with incredible riches available to us. If we would allow supply and demand to come together in the German real estate market through market economics, and not by forced Government solutions, the market would find a solution.
Attempts by the German government over the last 10+ years have only caused the housing problems to become worse.
This is what we are trying to do at GermanReal.Estate – to bring market economics back into the German real estate market while giving investors a chance to make a return on their investments.
It is in your best interest to make a return for yourself, and at the same time, this will also help the German real estate market. This is what Adam Smith discovered more than 200 years ago, but still, the government tries to get in the way. Investors should follow the data, and their self-interest, rather than believing in the political ideologies of politicians only claiming to act for the public good.