Federal Constitutional Court declares supplementary budget unconstitutional. What consequences does this have for the real estate industry?

In a ruling on November 15, 2023, the judges of the Federal Constitutional Court (BVerfG) declared the Federal Government's second supplementary budget for 2021 unconstitutional because it violates the debt brake enshrined in the Basic Law. With the supplementary budget, unused coronavirus aid funds amounting to 60 billion euros were transferred to a Climate and Transformation Fund (KTF).

Planned KTF programs, such as those to promote home ownership, climate-friendly new builds and the adaptation of urban areas to climate change, have been put on hold for the time being. However, the promotion of the replacement of old oil and gas heating systems and other funding for climate-friendly buildings will remain in place. The Bundestag is due to adopt a new draft budget in the week of the session from November 27 to December 1. According to the government, the regular budgets of the federal ministries are not affected by the ruling. The federal budget for the coming year will therefore be passed as planned.

Stop of KfW funding programs

One direct consequence of the ruling by the Federal Constitutional Court is hitting housing companies particularly hard. This is because the state development bank KfW has stopped four programs relating to housing and construction. With immediate effect, no new applications can be submitted for these programs and no more commitments can be made. Promotional loans and investment grants that have already been approved are not affected. Specifically, the following KfW funding programs are affected: Promotion of cooperative housing (134), Age-appropriate conversion barrier reduction - investment grant (455-B), BMWSB hardship program for housing companies 2023 (805), Energy-efficient urban refurbishment - grant (432). KfW is not yet able to assess whether further programs will be discontinued.

Early expiry of the energy price brake at the end of 2023

In addition to the Climate and Transformation Fund (KTF), the Economic Stabilization Fund (WSF) will also be closed following the ruling of the Federal Constitutional Court. This means that the state price brake for gas, district heating and electricity financed by the special fund will not be extended and will expire at the end of the year. Due to the high energy prices as a result of the war in Ukraine, the German government had temporarily reduced the VAT rate on gas from 19% to 7%. The reduction was originally intended to apply until the end of March 2024. The WSF's special fund contains loans amounting to 200 billion euros and is now being wound up. These funds were also used to finance the energy price brake. A large part of the funds were already invested in 2023 and are now to be booked in a supplementary budget.

vdp figures - slight upturn in demand for residential construction loans

According to a report by the Association of German Pfandbrief Banks (vdp), demand for residential construction loans recovered slightly in the third quarter of 2023, following a sharp slump in the previous months. In the third quarter of 2023, the loan volume for apartments and houses rose to EUR 16.9 billion, an increase of 13.4% compared to the second quarter of 2023. Loans for commercial real estate also increased by 19% quarter-on-quarter to EUR 13.8 billion. In a year-on-year comparison, however, new lending business in both asset classes fell sharply, with residential real estate down 22.5% and commercial real estate down 20.2%. Overall, the banks' new lending business in the first half of 2023 was around 50% below the previous year's level.

Rents rise, danger of real estate bubbles decreases

New residential construction has fallen sharply and rents are also falling for the first time in many years. Against this backdrop, according to calculations by real estate specialist Empirica, the risk of a real estate bubble in Germany is also decreasing. The Empirica bubble index is published quarterly and counts the excess of German districts "at risk" of a real estate bubble compared to districts "without risk". In the third quarter of 2023, the bubble index fell by a total of two points compared to the second quarter of 2023. At minus four points, the decline was most pronounced in the metropolitan areas. In the growth regions, the decline averaged minus two points. However, nine of the twelve largest German cities still have a "rather high" risk of overheating. The setback potential, i.e. the percentage price difference between rents and purchase prices for condominiums as an indicator of the risk of a bubble, has fallen nationwide after eleven years of increases since 2022 and now stands at 24%. In the third quarter of 2022, the figure was still 31% and three years ago it was 25%. The change in the ratio is the result of the lack of new builds due to rising construction and financing costs. This is leading to high rent increases. Buildings with a good energy balance are the main beneficiaries of this. For properties in need of refurbishment, the rent increase is limited by rising ancillary costs.