KfW Executive Board Member for domestic promotional business Katharina Herrmann on rising construction interest rates, climate-friendly construction promotion and the housing sector of the future.
What do you think of the current developments on the housing market?
KATHARINA HERRMANN It is obvious that the market environment today is much more challenging than it has been in previous years. The sharp rise in construction interest rates and construction costs as well as supply chain problems are having a severe impact on housing construction. Building permits are around 30% below the previous year’s level. The situation is exacerbated by the fact that demand for housing is significantly exceeding supply. Both the housing construction and renovation rates are lagging behind the targets set. Experts estimate that there is a current need for around 700,000 additional housing units. That is why it is important to create new housing quickly. In this regard, we are seeing some initial positive signals: the rise in construction prices seems to be slowing down; property prices recently late have been somewhat more moderate again. However, this is no reason to rest on our laurels.
How do we get the building sector on the path to climate neutrality and at the same time ensure that housing remains affordable?
The housing market is facing the major task of becoming more sustainable. Climate targets in the building sector have so far been missed. The industry therefore needs clear sustainability standards, accompanied by support that ensures that climate-friendly buildings are financially accessible to as many people as possible. The new-build funding set up at the beginning of 2023 by the Federal Ministry for Housing, Urban Development and Building and KfW was the right step to take here – and an important one at that. But we cannot stop there: we are in constant contact with politicians, our financing partners and representatives from the construction industry in order to identify further important levers. One approach could be to convert unused office space into residential space.
since April 2023 KfW Executive Board Member for domestic promotional businessRead more
What instruments can KfW as a promotional bank use to help overcome the challenges and where does policy come in?
Essentially, policy determines the objectives and framework conditions, and supports desired developments with various measures. KfW funding is an important component in this. Our job is to create marketable financial instruments for political objectives. There are different promotion options to cover the various customer needs, for example promotional loans, which we issue via our financing partners: we also pass on interest rate benefits from our own funds and leverage budget funds, in so doing creating incentives for sustainable investments. Another option is investment subsidies, for example for measures to make residential buildings more suitable for elderly people so that people can stay in their own homes for longer. We also place a significant focus on consultancy for the federal ministries, whereby the emphasis is always on how we can make small funding volumes go a long way.
In the first half of 2023, KfW further developed its offer in the new-build promotion area with the Climate-friendly construction and Home ownership for families programmes. Both programmes must meet even more demanding sustainability criteria. What are the objectives behind this?
Germany has committed to becoming climate neutral by 2045, which is why the housing market must also become more sustainable. KfW was entrusted with the task of focusing the promotion of new-builds on particularly climate-friendly buildings. We have taken this into account with our restructuring: for the first time, the focus of the Climate-friendly Construction programme, which is open to all investors, is on CO2 emissions throughout the entire life cycle of the building.
Since June, there has been a supplementary promotion for families with children and low or medium incomes. Again, construction projects receive funding if they meet high sustainability standards. With the new promotion, we are supporting the creation of housing that is both sustainable and affordable.
How do you rate the success of the programmes after the few first months?
Despite the very difficult market environment, the Climate-friendly Construction programme has seen good levels of demand since it was first launched. By 31 August 2023, 9,300 loans amounting to EUR 3.6 billion were committed – for 23,200 housing units. Around 40% of the housing units that are supported meet the most ambitious standard “with QNG sustainability label”, which is particularly positive. On the other hand, demand for the Home ownership for families programme is currently still modest.
If not all challenges can be overcome with promotional funds, what innovative approaches do you think are still available to ease the difficult situation on the housing market?
It will not be possible to finance the required sustainable housing entirely from budget funds. Therefore, on the one hand, targeted and efficient promotion is needed and, on the other, innovative concepts are also needed to tackle the changed situation in the best possible way.
One such innovation is, for example, the recycling of construction materials. Stuttgart-based business Concular is one such company that provides this service. Meanwhile, serial renovation with modular prefabricated elements is another option. In addition, we use our expertise to develop innovative solutions beyond the traditional banking business. One example is consulting tools such as the KfW renovation calculator, which we have just successfully piloted with two financing partners.
What do you think the housing sector of the future looks like?
In my view, the housing sector of the future must be climate-friendly, social and innovative. By climate-friendly, I mean that construction and refurbishment projects in the future use significantly fewer resources and produce zero emissions. They also make use of sustainable materials. By social, I mean that there is housing available in Germany that is suitable and affordable for all. The residential sector will become “innovative” through connectivity and automation, among other things, which will save energy in the future and at the same time increase our comfort at home and work.
Published on KfW Stories: 6 November 2023.