FRANKFURT: Germany has long benefited from an era of cheap money that fuelled a decade-long boom in real estate, but now the sector is grappling with a major turn of fortune.

In the latest signs of stress in the sector, Germany’s largest real estate group Vonovia posted multi-billion euro losses and writedowns, while job growth for construction workers has stagnated.

Weakness in real estate has also emerged in the United States and Sweden, but Germany is significant because it is Europe’s largest economy and the biggest real estate investment market on the continent.

The property sector makes up roughly a fifth of economic output and one in 10 jobs, according to the German Property Federation.

New construction plummeted in Germany during the first half of the year, dropping 47% compared with the average of the past two years, and new building permits plunged 27% during the first five months.

Home prices also declined in the first quarter by the most since Germany’s statistics office began keeping data, down 6.8% from a year earlier.

In September, data will show to what extent the trend is continuing and shed light on the state of construction jobs.

“The current crisis will certainly continue for a while yet,” said Sven Carstensen, chief executive of Bulwiengesa, a property consultant and analysis firm.

The main factor has been a sudden and rapid rise in interest rates by the European Central Bank as it clamps down on the highest inflation rates in decades, but there’s more to it.

Building costs have also soared, and the demand for offices and retail space has waned after the pandemic. The Ukraine war has also made German property seem riskier for foreign investors.

“If you are an investor from the Middle East, Germany seems to be quite close to Ukraine. They say, I want to allocate money to the United States and Asia and not to Germany,” said Florian Schwalm, a consultant with EY.

Higher interest rates have been a boon for banks by helping them to generate big increases in interest income, but real estate lending is also a large part of their business.

BaFin, the nation’s financial watchdog, is on high alert and has identified property corrections as a top risk. It is analysing bank lending for residential and commercial real estate.

Deutsche Bank, the nation’s biggest bank, is streamlining its mortgage business in a move that will trim hundreds of jobs, and some insurers, which invest in property in their vast holdings, are now in the process of revaluing their portfolios. — Reuters