Rising rates and bankrupt developers rock Berlin real estate

Valeriy Shevchenko thought he'd secured his dream two-bedroom apartment in Berlin, but his happiness was short-lived as the developer, Project Immobilien, declared bankruptcy. Rising interest rates and raw material costs have led to a surge in developer insolvencies in Germany over the past year.

Shevchenko and many others saw their construction projects grind to a halt due to financial troubles. Chancellor Olaf Scholz has called property sector leaders to discuss ways to revive construction, which had been thriving due to low-interest rates and demand.

However, the European Central Bank's rate hikes, prompted by Russia's invasion of Ukraine and inflation, have increased mortgage costs, driven down property prices, and squeezed builders' profit margins.

Moreover, higher raw material costs, exacerbated by the Ukraine conflict, have made projects less financially viable. Notably, the developer giant Vonovia halted 60,000 projects due to the crisis.

A recent survey by the economic research institute Ifo found that one in five property companies cancelled projects in August, with 11.9 per cent facing financing difficulties, unprecedented figures in 30 years. Many buyers have paid substantial sums toward halted projects with no financial protection.

The property crisis not only affects investors but also risks triggering a social crisis as the rental market feels the impact of a construction slowdown. The German government had promised to build 400,000 homes annually to address housing shortages exacerbated by an influx of refugees and foreign workers. However, building permits have plummeted 25 per cent compared to the previous year.

Experts predict that the sector will struggle to reach 250,000 new build approvals this year and even less next year, worsening rent increases and diminishing purchasing power. Housing Minister Klara Geywitz has announced plans to aid families in getting on the property ladder and invest an additional billion euros into student housing by 2025, but industry experts believe more comprehensive measures are needed to tackle the property market's dire state.

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