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Skyrocketing interest rates around the globe have culminated in a worldwide housing crisis as economies deal with the problem of burgeoning unaffordable housing.
Germany, Europe’s largest economy, has been dealing with slower construction amid stagnant demand, causing the property market to shrink rapidly.
“The homebuilding or construction sector is the first victim of higher interest rates,” Carsten Brzeski, global head of macro research and chief economist for Germany at ING Group, told CNBC. Brzeski pointed to increased costs of material and energy as well as overall financing costs as the key reasons for the collapse.
Like the U.S., Germany is grappling with declining homebuilding sentiment as construction costs rapidly rise because of sky-high interest rates and inflationary pressures.
Despite the headwinds, housing demand has remained strong in the U.S. That is not the case in Germany, which is struggling with declining home prices because of stagnant demand.
German residential property prices fell by 9.9% year over year in the second quarter, marking the steepest decline since 2000. Analysts predict a greater-than-anticipated decline in German home prices this year and next, attributing it to diminished demand resulting from elevated interest rates, according to a recent Reuters poll.
“Higher interest rates forced about half of all potential buyers out of the housing market … and therefore will lead to price reductions in the German housing market in this and the next few years,” BayernLB senior real estate analyst Sebastian Schnejdar said.
Shrinking demand has wreaked havoc on the German construction sector as companies cancel ongoing residential construction projects and slash future projects amid the bleak sector outlook.
According to a recent report by the Ifo Institute for Economic Research, a record high of over 22% of companies canceled residential construction projects in Germany. Simultaneously, 48.7% indicated a shortage of orders, compared to 46.6% in September and 18.7% a year ago.
“Things continue to go from bad to worse in Germany’s construction sector. The housing sector is the epicenter of the downturn, nosediving at a breakneck speed,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.
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