Development of the Economic Environment
Two years after the beginning of the pandemic, Russia’s war against Ukraine is creating new challenges for the EU economy. The economic outlook for the European economy before the outbreak of the war foresaw a long and robust expansion phase. However, the European Commission now expects lower growth and higher inflation, particularly in 2022. In addition, the outlook could be further hampered by an escalation of the war, a sudden halt of the supply of energy, or a further slowdown of economic activity in the USA or China. According to the Federal Statistical Office (Destatis), the German economy started 2022 with slight GDP growth (GDP in first quarter of 2022 +0.2% compared with the previous quarter) despite the difficult global economic conditions. While GDP in Sweden decreased slightly during the same period (-0.8% compared with the previous quarter), OECD data shows that the increase in Austria was comparatively strong at 1.5% compared with the previous quarter. According to the OECD Economic Outlook (preliminary version) of June 2022, GDP growth of 1.9% in Germany, 2.2% in Sweden and 3.6% in Austria are expected in 2022.
Despite the war in Ukraine, the labor market continued to develop favorably in May. However, the large-scale registration of Ukrainian refugees had a strong influence on unemployment and underemployment in Germany in June. According to the German Federal Employment Agency (Bundesagentur für Arbeit), the unemployment rate based on the total civilian labor force in June 2022 fell by 0.5 percentage points year-on-year to 5.2% (not adjusted for seasonal work). The Ukrainian refugee migration is likely to have increased the unemployment rate by 0.3 percentage points. According to Statistics Sweden, the unemployment rate in Sweden in May 2022 was 8.5%, 1.3 percentage points lower than in the previous year. According to national calculations by the Austrian Public Employment Service (AMS), the unemployment rate in Austria in June 2022 was 5.5% and thus 1.5 percentage points lower than in the previous year. Based on respective national definitions, the average unemployment rate expected in 2022 is 5.1% for Germany (IfW Kiel), 7.6% in Sweden (National Institute of Economic Research) and 6.3% in Austria (WIFO).
Measured against the national Consumer Price Index (CPI), inflation increased further compared to the previous year and likely amounted to 7.6% in Germany, 8.7% in Sweden and 8.7% in Austria in June 2022. This development is being driven by considerably higher energy prices, which have risen in particular since the beginning of the war in Ukraine, but also by recent noticeable increases in food prices. The average inflation rates in 2022 are expected to be somewhat lower. Based on respective national definitions, the expected consumer price index increase is 7.4% in Germany (IfW Kiel), 6.8% in Sweden (National Institute of Economic Research) and 7.8% in Austria (WIFO).
In June, the European Central Bank (ECB) announced the first interest rate hike in more than ten years. The key interest rates for the main refinancing rate will increase by 50 basis points as of July 27, 2022. The ECB ceased to purchase bonds as of July 1, 2022. The high inflation rate also led the Swedish Riksbank to increase the policy rate, first in May 2022 to 0.25% and then to 0.75% at the beginning of July. In the second half of the year, the Riksbank will also purchase fewer bonds than initially decided. Further increases of key interest rates or the policy rate could ensue over the further course of the year. For example, in Germany Qualitypool, which is part of the Hypoport network, reports that the upward trajectory of the average best interest rates for construction financing since the beginning of the year has continued to the end of the month following a short break in early June.
The housing markets in Germany, Sweden and Austria have proven to be robust during the coronavirus pandemic. Rents continue to increase; empirica reports that, across Germany, quoted rents were 5.3% higher on average over all years of construction in the second quarter of 2022 (new construction 5.5%) than in the same quarter of the previous year. Further rent increases are likely in 2022. According to “Hem & Hyra,” the member magazine published by the Swedish tenants’ association (“Hyresgästföreningen”), 81% of all rents for 2022 had been negotiated as of early April. The average rent increase until that point was 1.71%. Measured against the index for actual rental payments for primary residences as part of the consumer price index, rents in Austria have also seen an overall slight increase since the beginning of the year following a dip over the course of 2021.
Residential property ownership continued to become more expensive compared to the previous year. The empirica price index for condominiums in Germany (all years of construction) increased by 9.2% in the second quarter of 2022 compared to the same period of the previous year (new construction 10.5%). The experts at BayernLB expect a noticeable slowdown of the positive price momentum in Germany over the course of 2022. According to Svensk Mäklarstatistik, prices for tenant-owned apartments (Bostadsrätter) in Sweden increased by 2.0% in June 2022 compared with the same month of last year. However, the price development most recently recorded dips. The values of the current residential real estate price index of the Austrian central bank (OeNB) on the basis of new and used condominiums and single-family residences show an increase in Austria in the first quarter of 2022 of 12.3% compared to the previous year. According to estimates by Raiffeisen Research from March of this year, the second half of the year could show less momentum than the first. Not least due to the widening of the gap between purchase prices and rents, the empirica bubble index for Germany showed a moderate to high risk for 342 out of 400 administrative districts and self-governing cities in the first quarter of 2022. In addition to those factors having a negative impact on demand, however, factors that are helping to stabilize demand and prices are also currently at play, for example, immigration or the dwindling supply of new-build properties. The deviation of the trend for residential real estate prices in Austria from the development of the factors included in the OeNB’s fundamental price indicator has accelerated further, suggesting that the residential real estate market is increasingly overheating. Despite the recent dampers on prices, experts currently assess the risk of a real estate bubble in Sweden as being low.
The populations of Germany, Sweden and Austria grew in 2021. There is still a shortage of apartments in many large cities and urban areas. Meanwhile, construction activity declined in Germany. According to Destatis, only 293,393 apartments were completed in 2021 (2020: 306,376). The German federal government set itself the goal of building 400,000 new apartments per year in Germany. In the wake of Russia’s war against Ukraine, the German real estate industry expects up to 1.29 million refugees and short-term demand for up to 500,000 additional apartments. Boverket estimates that approximately 63,400 apartments have to be built per year in Sweden by 2030. In 2021, only around 53,000 apartments were completed. According to Bank Austria, residential construction activity in Austria has largely addressed the marked increase in the demand for homes in recent years. However, gaps are likely to be found primarily in the sector comprising low-cost rental apartments in metropolitan areas. In light of the aftermath of the COVID-19 pandemic and the impact of the war in Ukraine, the construction industries now face higher prices, disrupted supply chains and actual or looming material shortages. In addition, Germany and Austria are suffering from a shortage of skilled labor. DB Research most recently reported positive signs for Germany at the end of June in the form of dropping commodity prices and waning material and staff shortages.
The German residential investment market showed a conservative first half of 2022. According to CBRE, the transaction volume amounted to € 7.7 billion and was thus below the average for the first half-year of each of the last five years. While prime yields increased in the face of the interest rate turnaround, average yields for existing and newly built properties remained stable. According to Newsec, the volume in the residential investment market in Sweden in the first half of 2022 came to approximately SEK 34.9 billion and was thus 7.5% lower than in the previous year. According to EHL, the Austrian real estate investment market saw a transaction volume in the first half of the year of approximately € 2 billion. The share of institutional residential projects amounted to approximately 19% and was thus lower overall than in the same period of the previous year.
Housing policy developments in the first half of the year in Germany included the decision at the end of May to introduce a rent cap in Dresden and Leipzig, and changes to the Federal Funding for Efficient Buildings (BEG). After it once again became possible to apply for BEG renovation programs starting in February, BEG subsidies for new buildings were also reintroduced in April, with amended subsidy conditions. Furthermore, the German cabinet approved a draft bill for dividing CO2 costs between landlords and tenants. In Sweden, investment subsidies for rental apartments were discontinued at the turn of the year. Applications that are not granted this year depend on there being a political mandate for additional funds in 2023. In Austria, indicative and category-based rents were increased as of April 1, 2022. Moreover, in the first half of the year a revision of real estate law was announced that would make the person who hires an agent responsible for paying their service fee.