Construction Companies Facing Mass Bankruptcies... Germany's Economy Hit by 'Real Estate Perfect Storm'

Housing Construction Market Hits Worst in 32 Years

As German housing prices have plummeted sharply over the past year, fears of a real estate bubble collapse are spreading. There are also forecasts that the prolonged decline in real estate prices could act as a new trigger for the German economy, which is already facing a recession crisis.

According to Eurostat, the official statistical agency of the European Union (EU), as of the end of the second quarter of this year, Germany's House Price Index (HPI) stood at 153.27, down 10.0% from 170.14 in the same period last year. During this period, the HPI for the entire EU region decreased by only 1%. Germany's HPI has declined every quarter since the second quarter of last year.

The continuous decline in German housing prices is the result of a combination of factors, including demand deterioration due to steep interest rate hikes and rising raw material prices. The long boom driven by ultra-low interest rates following the 2008 global financial crisis came to an end last year with the European Central Bank's (ECB) shift to tightening. Since July last year, the ECB has raised its key interest rate 10 consecutive times, causing mortgage rates in Germany to soar rapidly, leading to simultaneous declines in housing prices and transactions.

German Chancellor Olaf Scholz.
[Image source=EPA Yonhap News]

The overlap of high financial costs and rising raw material prices has increasingly caused construction projects to be delayed or canceled. Germany's raw material prices have surged more than 40% compared to pre-pandemic levels due to supply chain disruptions and geopolitical crises. A British media outlet noted, "Housing and commercial real estate development projects are being canceled one after another, and construction companies are being pushed to the brink of bankruptcy," adding, "With many construction firms going bankrupt, it is becoming difficult for the German government to achieve its annual new supply target of 400,000 units."

According to the Ifo Institute, a leading German think tank, one in five (22.2%) new housing construction projects was canceled last month. This is the worst performance in 32 years since related statistics began in 1991. Klaus Walleib, an Ifo analyst, pointed out, "Construction companies are suffering from a drought in orders," adding, "The situation is worsening."

The German government hastily introduced stimulus measures to prevent a hard landing in the real estate market, but the industry views achieving these goals as difficult due to excessive bureaucracy and other factors. Wolfgang Schubert-Lav, Executive Director of the German Construction Federation (ZDB), bluntly stated, "The housing market, which was booming just two years ago, is now facing a complete collapse crisis." Gereon Frauenrat, CEO of the construction company Frauenrat, warned, "A perfect storm is approaching the German real estate market."

Experts predict that this crisis could be more severe and prolonged than expected. The German economy is rapidly cooling amid energy supply instability caused by the Ukraine war, the effects of steep interest rate hikes, and a slowdown in exports to China, Germany's largest trading partner. Since the fourth quarter of last year, Germany has entered a technical recession with two consecutive quarters of negative growth, followed by zero growth in the second quarter of this year, and is expected to record negative growth again at -0.1% (preliminary) in the third quarter. This economic situation raises concerns that Germany could regress to the "sick man of Europe" in the 1990s, suffering a long-term slump due to structural problems that are difficult to improve in the short term, stemming from the aftereffects of East and West German reunification.

Susanna Stritter, Chief Investment Analyst at Hargreaves Lansdown, noted, "Since real estate was one of the growth drivers of the German economy, the real estate downturn is not a good sign."

This content was produced with the assistance of AI translation services.