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Real estate market: Housing will remain a social problem

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Real estate market: Housing will remain a social problem

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Page 1 — Housing will remain a social problem

Page 2 — More competition and higher productivity are essential

The prices for residential real estate fell significantly in 2023, as the Federal Statistical Office calculated. The Kiel Institute for the World Economy even described the decline as historically unique. Even the youngest ones Calculations by DIW Berlin to the purchase prices demonstrate this trend. The numbers fuel hope that housing will become more affordable again – after the explosion in rents and purchase prices over the last 15 years. Some are even speculating that a real estate bubble has burst.

However, this hope may prove to be an illusion. Rents in cities in particular will probably continue to rise. Instead of hoping for price corrections in the market, politicians should initiate the necessary reforms themselves.

Rents are likely to continue to rise

To speak of a real estate bubble bursting is exaggerated and misleading. In economics, we talk about a bubble when the value of a property deviates significantly from the factors that give it its long-term value. Above all, future price expectations play an important role: people and investors are willing to pay more money for an apartment or house if they expect that rents for comparable properties will increase in the future. Financing conditions also play an important role. Low interest rates, as we have had for many years, not only make financing a property cheaper, but also make alternative investments less attractive.

And this is exactly where the problem lies: Over the past ten years, purchase prices and rents for residential properties have drifted far apart because purchase prices have increased much faster than rents – as annual studies by DIW Berlin have found. Many now associate this with the hope that falling purchase prices will also lead to lower rents. However, a reversal of the trend means that prices will fall and at the same time rents – at least in larger cities – could continue to rise significantly in the coming years. This will continue until the gap between the purchase price and rent is closed again. In addition, Germany is experiencing difficult economic times, but private financial assets are not shrinking, but are continuing to increase – and with them the purchasing power of future property owners. Falling interest rates sooner or later are also likely to boost prices again.

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Social imbalance will worsen

Therefore, the correction in the real estate markets is good and necessary, but it will hardly curb the rise in rents or even lead to falling rents. In the big cities the opposite will continue to be the case.

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People with low incomes especially suffer from this. Because the housing shortage is usually increasing in large cities. There is still a net influx into most cities that exceeds the number of new housing constructions. The federal government had set itself the goal of building 400,000 new apartments annually – but is far from achieving this goal with fewer than 300,000 new apartments per year. And 2024 is also likely to be sobering in this regard, as the number of new apartments could continue to fall a DIW study shows. The responsibility for this does not primarily lie with the federal government, but with the cities and municipalities, which are responsible for the necessary framework conditions.

This is likely to further worsen the social imbalance. Over the past 25 years, middle- and low-income households have, on average, had to spend an ever-increasing proportion of their monthly net income on housing: almost a third of all tenants now spend more than 40 percent of their monthly net income on housing. And the increase in wages and salaries over the last ten years has not been able to cover the increase in rents and housing costs. Added to this is high inflation, with sharply rising food prices and energy costs – they have also significantly exceeded wage increases, especially for people in the low-wage sector.

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The prices for residential real estate fell significantly in 2023, as the Federal Statistical Office calculated. The Kiel Institute for the World Economy even described the decline as historically unique. Even the youngest ones Calculations by DIW Berlin to the purchase prices demonstrate this trend. The numbers fuel hope that housing will become more affordable again – after the explosion in rents and purchase prices over the last 15 years. Some are even speculating that a real estate bubble has burst.

However, this hope may prove to be an illusion. Rents in cities in particular will probably continue to rise. Instead of hoping for price corrections in the market, politicians should initiate the necessary reforms themselves.

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