High Interest Rates Leave Germany's Housing Market Facing A Wave Of Developer Bankruptcies And Spiraling Costs

When it comes to the European Union, Germany's economy has long been the proverbial 800-pound gorilla in the room — a role that has become even more important since Brexit. 

That's why economists on both sides of the Atlantic are concerned that high borrowing costs are pushing some of Germany's biggest home builders and developers into insolvency and roiling the country's housing market.

For decades, the German economy has ridden the strength of its industrial capability to become one of the world's foremost economic powers. Several of the world's most prominent automobile brands, including Mercedes-Benz, BMW and Volkswagen are built in Germany, where workers enjoy a high standard of living that includes state-sponsored healthcare and generous wage packets.

High wages have also made Germany's housing industry another vital economic sector and mirroring America's housing boom, years of low interest rates spurred both developers and banks in Germany to make big bets on real estate. Major housing developments sprung up in all of Germany's largest cities, including Berlin, Hamburg and Munich.

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German homebuyers were also happy to take advantage of low rates and as industry profits soared and developers borrowed more money to build more housing. It was all going fine until Germany and the entire European Union ran headlong into post-pandemic inflation, which led the European Central Bank to mimic the Federal Reserve by raising interest rates to keep inflation at bay.

The dramatic upward swing in interest rates dented consumer demand for housing and led to higher-than-anticipated building costs for many of Germany's biggest developers. If you think this sounds like a "perfect storm" of adverse factors that has the potential to severely damage Germany's real estate market, you're right.

Prices for German apartments began declining in the third quarter of 2023, which was bad news for German real estate developers because many of them were committed to projects that were still under construction. Even with that in mind, the extent of the economic impact has been surprising with several experienced and reputable German developers becoming insolvent.

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Among them is Project Investment, which has 3.2 billion euros ($3.4 billion) invested in 120 projects in Germany's biggest cities. Euroboden, which has been a mainstay in German commercial and residential real estate since 1999, also recently announced it is going under.  This has led to a great deal of pessimism in the German real estate industry. 

A recent study by the IFO Institute for Economic Research shows that Germany's business climate index has sunk to an all-time low of minus 59 points. Many analysts interpret that data as a sign that the malaise in the real estate industry has spread to other areas of the economy. All this has led to Germany's remaining developers petitioning the government for some form of relief.

Perhaps the biggest irony of the decline in Germany's real estate industry is that developers are going under at a time when Germany is experiencing a severe housing shortage. By some estimates, Germany needs to add up to 1 million housing units to satisfy demand. While there has been no indication that the government will get involved, it's worth noting that adding 400,000 new units was an essential part of the current government's platform.

It's still too early to predict how this will shake out for the German economy, but it's another example that the fundamentals of the economy are the same on both sides of the Atlantic. When real estate developers and banks get over-extended, the ripple effects are eventually felt in every economic sector.

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