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 * April 2023

Briefing on European Construction



TROUBLED TIMES FOR GERMAN NEW RESIDENTIAL CONSTRUCTION

by Ludwig Dorffmeister, ifo Institute



© Photo from Sean Robertson on Unsplash

In spring 2022, the prospects for new residential construction in Germany have
clouded over massively. The turnaround in interest rates, the renewed surge in
construction costs and the realignment of federal subsidies often mean that
financing is no longer possible. Under these conditions, the market turnaround
was inevitable. Nevertheless, it took almost a year before more precise
estimates – as opposed to mere speculation – of the medium-term market
correction became possible on the basis of official permission numbers.


Prices for housing construction services have increased by a total of a quarter
in the past two years. In addition, interest rates for new housing loans in
Germany climbed from 1.4% to 3.6% in 2022 (fixed interest rates over 10 years).
And last but not least, the German government decided in 2022 to focus very
strongly on promoting energy-efficient renovations in the future and is only
allocating around 1 billion euros per year to the new construction sector.
Unfortunately, these are not the only problems that have plagued clients,
investors and construction companies for years. There is, for example, a
shortage of building land (and a sharp rise in its price) and skilled workers,
excessive bureaucracy and regulation, including ever stricter cost-driving
energetic building requirements. So far, the sector has somehow managed to hold
its own and come to terms with the numerous obstacles. But now the housing boom
that began in 2009/10 is about to come to an end, even before housing supply and
demand have been brought into balance in many places.

The look at the monthly figures for building permits initially did not reveal
any conspicuous features that can be traced back to the changed framework
conditions (cf. fig.). A certain up and down compared to the respective month of
the previous year is the order of the day. In addition, the considerable decline
in single- and two-family buildings in March 2022 could be explained by the much
stronger increase in the year before. In March 2021, the application deadline
(referred to the month of the building permit) for a subsidy measure
specifically targeted at households with children expired. Arithmetically, it
was still not clear until August/September 2022 whether the declining monthly
values were due to the usual compensation of pull-forward effects or already to
the changed market environment. And also in multi-family house construction, new
building projects temporarily were applied for earlier due to tighter funding
requirements.


“THE FIRST IMPRESSION IS DECEPTIVE. IN FACT, THE CONSEQUENCES OF THE WORSENED
FRAMEWORK CONDITIONS ONLY BECAME VISIBLE FROM THE OCTOBER FIGURES ONWARDS”

ABOUT THE AUTHOR

Ludwig Dorffmeister

ifo Institute

https://www.ifo.de/en

dorffmeister@ifo.de

With the monthly values from October 2022 (publication date: mid-December 2022),
a clear decline in construction demand was now becoming apparent. Up to this
point, the lengthy administrative procedures regarding building applications
probably played an important role. Many of the construction projects that were
applied for in the course of 2022 were probably not even started because the
clients wanted to wait in view of the many challenges posed by the Ukraine war
and the funding cuts. In this respect, the approval figures available for 2022
probably significantly overstate the amount of newly initiated projects.

In the first two months of 2023, the shown development of the rates of change is
now inconsistent between the two building types. However, this is again likely
to have to do with the approval activity in the previous year. Apart from that,
on the basis of the more recent values, only around 75,000 dwellings in new
single- and two-family buildings (2022: 106,000 units) could be approved in
2023. A continuing slight downward trend is probable, especially in light of the
renewed strong construction price increase in the first quarter of this year.
The industry, and above all the finishing trade, is still living off the orders
still to be processed so the completion figures will only react with a
significant delay. Nevertheless, a figure of only 65,000 completions would be
conceivable for 2025 (about 20,000 units below the all-German low). The big
unknown here is: what has actually been started or for how long has it been it
been interrupted? Is the construction period shortening again somewhat because
of the lower demand/reduced utilisation?

For multi-family buildings (including residential homes), the drop height is
much greater. At the worst times, only about 53,000 flats were completed. In
2022, there will probably have been around three times as many. The fact that
many cities are encouraging their municipal housing companies to continue their
activities even under the new conditions and, if necessary, are providing
impetus with targeted financial injections, special subsidies and heavily
discounted land costs may speak against an all too sharp drop. Individual
federal states have also responded with better funding conditions for social
housing construction. Nevertheless, most private and cooperative actors
currently do not see themselves in a position to carry out new projects, because
the required rents and purchase prices could not be obtained on the market. In
view of the current approval figures, a big decline down to 145,000 permits in
2023 does not seem unrealistic. With the probably significantly lower
realisation rate, this could mean for 2025 that maybe 110,000 completions in
multi-family buildings would still be reported. In the same scenario, the
100,000 mark could even be undershot in 2026. A major problem is that not only
significantly fewer projects are physically started, but also that considerably
fewer projects are initiated or prepared because of the gloomy conditions. This
will push down the number of permits in later years.

Together with the possibly likewise declining figures in the area of other
completions (dwellings in existing buildings and in new non-residential
buildings), the number of projects could actually drop within the period 2022-25
by one-third to only around 200,000 housing completions. The resulting pressure
on specialised construction companies to adapt (including staff reductions) is
likely to be considerable. Actually, the federal government has set itself the
goal of building 100,000 more housing units per year (namely 400,000).
Unfortunately, its decisions are currently contributing to 100,000 fewer being
built.

ABOUT THE AUTHOR

Ludwig Dorffmeister

ifo Institute

https://www.ifo.de/en

dorffmeister@ifo.de

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LEGAL NOTICE: IFO INSTITUTE IS RESPONSIBLE FOR THE CONTENT AND ANY IMAGES ON
THIS PAGE.


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