Development of the Economic Environment
According to the European Commission, the EU economy showed better development than expected in the winter just past – just after a winter recession in the EU appeared inevitable last year. The EU made a good job of weathering the energy crisis and the risk of shortages next winter is now considerably lower. The EU economy’s resilience has, however, also delayed the slowdown in inflation. The Federal Statistical Office (Destatis) reports, by contrast, that the German economy started 2023 with a slight drop in gross domestic product (GDP, Q1 2023 -0.3% compared to the previous quarter), marking two negative quarters in a row. Sustained hefty price increases had a negative impact at the start of the year. According to Statistics Sweden (SCB), GDP there rose by 0.6% during the same period. The upswing can be traced back primarily to an increase in inventories and strong growth in goods exports. Austrian GDP also grew in the first three months of 2023, albeit only slightly, by 0.1% as against the previous quarter. However, the Austrian statistical office, Statistik Austria, is reporting that the growth momentum has flattened out in almost all sectors of the economy. For 2023, GDP growth of -0.3% is forecast for Germany (IfW Kiel), -0.2% for Sweden (National Institute of Economic Research) and 0.3% for Austria (Institute of Economic Research, WIFO).
While the labor market in Germany was initially quite stable despite weak economic development overall, the economic slump is also leaving its mark here. The German Federal Employment Agency (Bundesagentur für Arbeit) reports, for example, that unemployment rose in June 2023, while underemployment fell. The unemployment rate based on the total civilian labor force rose by 0.3 percentage points year-on-year in June 2023 to 5.5% (not adjusted for seasonal work). The migration of Ukrainian refugees had an impact of around 0.4 percentage points. According to Statistics Sweden (SCB), the unemployment rate in Sweden fell by 0.6 percentage points as against May 2022 to 7.9% in May 2023 (not adjusted for seasonal work). According to national calculations by the Austrian Public Employment Service (AMS), the unemployment rate in Austria in June 2023 was 5.7% and thus 0.2 percentage points higher than in the previous year. Based on respective national definitions, the average unemployment rate expected in 2023 is 5.6% for Germany (IfW Kiel), 7.5% in Sweden (National Institute of Economic Research) and 6.4% in Austria (WIFO).
Measured based on the consumer price index (CPI), inflation in Germany came in at 6.1% year-on-year in May 2023 and 6.4% in June, according to Destatis. This signals a drop in inflation rates compared with the beginning of the year. DB Research ascribes the slight increase from May to June primarily to base effects linked to the introduction of the fuel discount and the nine-euro public transport ticket in June 2022. In Sweden and Austria, year-on-year inflation rates based on the respective national CPI came to 9.3% (SCB) and an estimated 8.0% (Statistics Austria) in June 2023, and were also down on the rates witnessed at the beginning of the year. Inflation rates remain high in all three countries. Recent factors driving inflation include higher food prices in Germany, the development of mortgage interest rates for households in Sweden and the prices of household energy in Austria. The average inflation rates in 2023 are expected to be somewhat lower. Based on respective national definitions, the expected consumer price index increase is 5.8% in Germany (IfW Kiel), 6.1% in Sweden (National Institute of Economic Research) and 7.5% in Austria (WIFO).
In a quest to make a timely return to its 2% medium-term inflation target, the European Central Bank (ECB) raised key rates further in several steps in the first half of 2023, bringing it to 4.00% at the end of June 2023. High inflation also prompted the Swedish Riksbank to take further steps to lift its policy rate from the beginning of the year, most recently raising it to 3.75% on 5 July 2023. Further increases in the key rates/policy rates are possible in 2023. In this overall environment, interest rates for construction in Germany, Sweden and Austria were higher overall in the first half of 2023 than they were in the same period of the previous year.
The interest rate environment is having an adverse impact on the real estate markets. The residential property markets had already cooled down in the course of 2022 and the residential investment market is dominated by price adjustment processes and low transaction figures. Meanwhile, Savills describes the fundamental conditions in Germany as being more attractive than usual from the landlord’s perspective. According to DB Research, the rental housing market has received further demand impetus from the larger population and from the redirection of potential buyers into the rental market. Quoted rents continued to increase across Germany; empirica reports that they were 5.5% higher on average over all years of construction in the second quarter of 2023 (new construction 5.2%) than in the same quarter of the previous year. Rents are likely to increase further in 2023, with considerable increases expected for both quoted and existing rents. According to “Hem & Hyra,” the member magazine published by the Swedish tenants’ association (“Hyresgästföreningen”), around 60% of all rents for 2023 had been negotiated as of March. The average rent increase until that point was 4.12%. Measured against the index for actual rental payments for primary residences as part of the consumer price index, rents in Austria also rose further from the beginning of the year and were approx. 7.5% higher in May 2023 than in the comparable previous-year month.
Although residential property prices were still climbing at the start of 2022, price growth slowed down noticeably in Germany, Sweden and Austria as the year progressed. The trend towards declining prices in Germany continued at the beginning of 2023. The empirica price index for condominiums (all years of construction) was 5.5% lower in the second quarter of 2023 compared to the same period of the previous year (new construction -0.2%). Given the fundamental shortage on the supply side in particular, DB Research only expects a temporary dip in prices in Germany. According to Svensk Mäklarstatistik, prices for tenant-owned apartments (Bostadsrätter) in Sweden fell by 5.4% in June 2023 compared with the same month of last year. Prices started to make a slight recovery since the start of 2023. According to SEB, however, the ongoing rise in interest rates suggests that residential property prices in Sweden could fall even further. 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 2023 of 1.1% compared to the previous year. In a short-term analysis measured in terms of quarter-on-quarter increases, residential property prices fell at the end of 2022 for what was the first time in several years, namely by 2.0% initially. According to the Austrian central bank (OeNB), prices in the first quarter of 2023 stagnated at more or less the level seen in the previous quarter (-0.4%). While it is impossible to rule out further slight price drops, the OeNB considers the risk of sudden marked price corrections to be fairly low at the moment.
The size of the population in Germany, Sweden and Austria rose again in 2022 and is expected to increase further. There is still a shortage of apartments in many large cities and urban areas. Construction activity, however, is expected to drop considerably. According to Destatis, 295,300 apartments were completed in Germany in 2022. According to calculations performed by the Institute for Economic Research (ifo), the number of completions could gradually fall to only 200,000 residential units in 2025 due primarily to the considerable increase in the cost of financing and construction services. The German federal government set itself the goal of building 400,000 new apartments per year in Germany. With the demand for housing still on the rise, Savills reports that a large number of cities and regions are facing a huge housing shortage. Boverket estimates that approximately 63,000 apartments have to be built per year in Sweden by 2030. In 2022, only around 56,700 apartments were completed. According to Boverket’s calculations, completions will peak at around 58,000 apartments in 2023 before falling to around 40,000 in 2024 and around 30,000 in 2025. This means that the additional annual need will not be met. According to the OeNB, Austria is witnessing the end of a pronounced residential construction cycle. According to Bank Austria, residential construction activity there 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 bigger cities. Based on an OeNB estimate, the number of apartments completed is expected to drop from 59,000 in 2022 to 57,000 in 2023 and 43,000 in 2024.
The construction industries and project development markets are being hit by higher interest rates and less favorable financing conditions as well as by higher construction costs. In addition, Germany and Austria are suffering from a shortage of skilled labor. In Germany, the government has reduced new construction subsidies to a minimum, and it imposed more stringent new construction standards at the start of 2023. Investment subsidies for rental apartments in Sweden were discontinued as of the end of 2022. In the current circumstances, new construction developments are barely viable in commercial terms.
The German residential investment market showed a sharp decline in the first half of 2023 compared to the first half of 2022. Savills put the transaction volume at € 3.7 billion, 53% lower than in the previous year. According to BNP Paribas, the subdued transaction activity can be traced back to macroeconomic uncertainty and costlier debt financing in the context of higher interest rates. Meanwhile, the phase of price adjustment continued. The interest rate turnaround means that buyers and sellers have different price expectations. According to Savills, prime yields have risen by 120 basis points to 3.4% since March 2022, triggering a short-term drop in capital values. The fact that the housing shortage is set to worsen is likely to push rents up further, which should mean a return to higher capital values in the long term, according to Savills. BNP Paribas expects to see higher momentum on the residential investment market at the end of 2023 due to expectations of an initial interest rate pause in the fall. According to Savills, properties worth SEK 35 billion were traded on the Swedish transaction market in the period between January and May 2023, around 65% less than in the first five months of the previous year. Residential properties accounted for 19% of the total volume. According to EHL, the Austrian real estate investment market saw a transaction volume of approximately € 1.2 billion in the first half of 2023, roughly 45% less than in the previous year. The share of the residential segment stood at 14.8% and was therefore down on the previous year (first half of 2022: 19.2%).
Housing policy developments in Germany in the first half of 2023 included changes to the Federal Funding for Efficient Buildings (BEG). A reform of the BEG came into effect at the start of 2023; as such, new conditions apply in respect of refurbishments to achieve energy-efficiency building standards as well as for individual measures. Since March 1, 2023, funding guidelines have been available for climate-friendly new construction, with loans available on more favorable terms for environmentally friendly buildings that meet the KfW Efficiency House 40 standard. In the German Buildings Energy Act (GEG), the permissible primary energy level for new builds was tightened at the start of 2023. While details of a further amendment to the Buildings Energy Act were being discussed at the end of June 2023, it was not possible to adopt the law in the German Bundestag (lower house of parliament) as planned at the beginning of July. The “Heating Act” largely stipulates that in the future, the country will only permit the installation of new heating systems that can run on at least 65% renewable energies. The Act is likely to come into force in 2024 at the earliest. A law on the division of CO2 costs between landlord and tenant came into force on January 1, 2023. The straight-line rate for the amortization of residential buildings was increased from 2% to 3% as of January 1, 2023. This applies to residential buildings completed as of January 2023. A subsidy program called Home Ownership for Families (Wohneigentum für Familien) was also launched at the start of June 2023. An expert commission convened by the Berlin State Government on the “Socialization of major residential real estate companies” referendum submitted its final report at the end of June 2023, in which it stated that, in their opinion, the socialization of major residential real estate companies was possible from a legal perspective. The Berlin State Government will now start examining a framework socialization act. Mid-March 2023 saw the adoption of a draft revised version of the EU Building Directive. The Directive states, for example, that new builds are to produce zero emissions from 2028 onwards. In Austria, indicative rents were increased as of April 1, 2023, with category-based rents being increased effective July 1, 2023. Since July 1, 2023, the party hiring an agent has also been responsible for paying for their services in connection with the letting of apartments.