According to the Federal Statistical Office, the permanent population grew by 10% between 2013 and 2023 to a total of 8.96 million people. The main driver was net international migration combined with a positive birth surplus. As the following chart of real construction investment in the residential segment shows, the production of new apartments increased significantly between 2013 and 2018. Looking also at the evolution of the vacancy rate, which rose from 0.97% to 1.62% over the same period, even more housing units were produced than could be absorbed by the market. This vacancy rate also includes single-family homes or apartments that were offered for sale on the market. Interestingly, the homeownership rate was 37.4% in 2014. Since then, it has fallen to 35.9% in 2022, despite a period of negative interest rates. Typically, new residents first rent an apartment before buying a home.

Real investments in multi-family houses and vacancy rates

However, real construction investment in the multifamily sector has been declining since 2018 and is expected by Wüest Partner to remain below the 2013 level in 2024. Vacancy rates have also been declining since 2021 and have now reached a level of 1.15%. Sustained demand on the residential market has now completely eliminated the existing oversupply. In order to absorb the ongoing demand, more housing would have to be built. Even without the special effect of people immigrating from Ukraine, population growth was robust 1.0% in 2023. Thus, the much-discussed housing shortage is clearly due to the supply side, which is currently not responding to ongoing demand.

What are the reasons for the housing market not gaining momentum in the current environment?

For one thing, we are now back in a normal environment with positive policy rates. In addition to real estate and equity investments with bonds, there are again investment alternatives for pension funds and other institutional investors, who have invested heavily in residential construction in recent years. On the other hand, construction has become more demanding as part of the densification concept provided for in the Spatial Planning Act, and the requirements and conditions have increased significantly. A wide range of measures could be taken to counteract this and make multi-family construction more attractive again. For example, building and zoning regulations could be made more flexible, occupancy rates could be increased, permitting and appeal procedures could be simplified, and the use of prefabricated wood construction could be increased.

Such measures would increase the incentive to build additional housing and ultimately rebalance the market. As the above look at the past shows, there have been periods of oversupply in the housing market, i.e. the market is definitely cyclical and supply could currently be increased with the right incentive structures.