In the western suburbs of Frankfurt on a plot of land wedged between a highway and a wooded park, excavators are preparing the ground for 400 new apartments.
Busy construction work in Germany is a rare sign of activity in an industry that is insisting on cutting interest rates to get back on its feet.
Frankfurt municipal housing group ABG Holding and its financial partner LBBW Immobilien signed off on the project before things turned sour for the construction sector.
The coronavirus pandemic followed by the Russian invasion of Ukraine sent material costs soaring, and the subsequent rise in inflation forced the European Central Bank to quickly begin hiking.
However, a glimmer of hope may emerge as the ECB is poised to start cutting interest rates when its governors meet on Thursday.
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“The crisis was ultimately triggered by rising interest rates,” said Frank Berlepp, director of LBBW Immobilien.
Construction costs have risen, and to cover the increase, investors are demanding “rents of more than 20 euros ($22) per square meter, which almost no one can afford,” according to Frank Junker, head of ABG Holding.
“Totally broke down”
“Demand for condominiums has completely collapsed,” Berlepp told AFP.
Buying a single-family home depends on betting that things will get better for buyers, but “without interest rates coming down, the situation is not going to change,” Berlepp said.
Last year, around 294,000 new homes were built in Germany, just below the 2022 level, according to the federal statistics agency Destatis.
That figure is still well below the target of 400,000 new homes a year set by Chancellor Olaf Solz’s government to try to meet growing demand in cities.
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But with the number of approvals last year falling to the lowest level since 2012, the outlook doesn’t look much better.
A sharp slowdown in the number of sales, very little new construction, rising prices and a difficult time to get on the property ladder are some of the symptoms of the housing crisis seen across Europe.
The ECB’s benchmark interest rate is currently at an all-time high of 4% after policymakers accelerated borrowing costs to tackle soaring inflation.
But the first cut may not be enough to completely ease the pain for homeowners like Siobhan Mortimer from Ireland.
The 51-year-old lost her job as a tour guide during the pandemic and is struggling to meet the repayments on her home in Dublin, with mortgage interest currently sitting at a flat 3%.
“My mortgage is up for renewal in June 2024, I don’t think I’ll be eligible for a new mortgage after the ECB rate hikes,” Mortimer said, adding that she hoped borrowing costs would come down faster.
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Housing woes
The situation is equally difficult for those with variable rate mortgages, where repayments have risen as the ECB has raised interest rates.
Terry, from County Meath, Ireland, has seen his repayments rise from €850 to €1,000 a month in a year.
“I tried to switch to a fixed deal when interest rates started to rise quickly but the bank said no,” said the 42-year-old father of three.
“I’m still in arrears and the mortgage is almost fifty percent of my pay now,” he told AFP.
“An interest rate cut by the ECB would be good news, but only if banks quickly pass it on to their customers.”
In Germany, analysts such as Jochen Moebert from Deutsche bank believe the housing sector’s darkest days could be over “by the end of 2024”.
Moebert points to the stabilization of the number of approvals and the “positive impact” of the recent changes to the depreciation rules for the construction sector approved by the government in Berlin.
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“However, an explosion like this between 2009 and 2022 will not happen again anytime soon,” Mobert said.
For that to happen, interest rates would have to be “significantly lower” than they are now, a distant prospect while inflation remains.
Source: AFP