Germany’s real estate sector in crisis due to bankruptcies and lack of social housing

When Valeriy Shevchenko signed the contract for an apartment to be built in a Berlin neighborhood, he believed he was making the purchase of a lifetime. But two years later, the sudden interruption of the work shattered his dreams.

The company Project Real Estatewhich managed the construction, went bankrupt this summer, hit by the real estate crisis that has been plaguing Germany for months, and left hundreds of buyers in poverty.

“The cranes, the equipment for the workers, they took everything“, he told AFP Shevhenkoa 33-year-old father, in front of a concrete facade, without windows.

With interest rates rising, demand in free fall and material prices skyrocketing, construction company bankruptcies have doubled in a year.

The head of the German government, Olaf Scholz, invited industry professionals to Berlin this Monday to present a plan to revitalize the sector, as Germany suffers from a serious lack of housing.

The program provides for more public loans for families, regulatory and tax reductions for builders, billions of euros to build social housing and support mechanisms for converting office blocks into residential ones.

250,000 euros

For years, the sector benefited from low interest rates due to the generous monetary policy of the European Central Bank (ECB). But, to deal with inflation, the ECB It had to increase them drastically and this hindered the demand for credit, the prices of goods and the profitability of the projects.

The market lost steam throughout Europe but in Germany it was especially affected: real estate sector prices fell by 6.8% in the first quarter of 2023, in contrast to the slight rise of 0.4% in the euro zone as a whole.

Added to this is the high cost of construction materials, due to the coronavirus pandemic and the war in Ukraine.

“Investors no longer know how to make some projects profitable”explained Tim-Oliver Müller, president of the HDB, the German construction federation.

One real estate company in five reported having canceled construction projects in August, and 11.9% of them have had financing problems, according to a recent survey by the IFO institute.

In Berlin, buyers of the building Project Real Estatein the central Prenzlauer Berg neighborhood, had already paid for half of their property.

“I am not rich. My money is the fruit of my work, I pay the interest on a loan that I don’t even enjoy”, lamented Shevchenko, who claims to have spent 250,000 euros.

Neither the company nor the future owners took out any insurance, so their only hope is to find a buyer to finish the project or finish it themselves.

“I would never have thought something like this could happen in Germany.”he said, crying, Marina Prakharchuk, 39 years old. She has already paid 175,000 euros for a 45 m2 apartment in the same property.

social bomb

“More affordable buildings must be built in Germany so that those looking for an apartment can find”Scholz stressed this Monday.

This crisis deals a severe blow to his government, which when it came to power at the end of 2021 promised to build 400,000 homes a year. A very distant goal: the sector hopes to reach 250,000 this year, and even drop to 200,000 in 2024.

The needs are pressing and the situation could become a social bomb, as rental prices are skyrocketing.

In a country where half of the population does not own their home and with inflation above 6%, the purchasing power of households could sink even further.