Costs increase by 17% as building sector fears ‘complete collapse’

Figures released by Germany's Federal Statistics Office on the rising costs of building construction continue to cast a shadow on prospects for project developers, many of whom have now cancelled any developments they haven't started, and put a stop to many that are in various stages of completion.

An alliance of 17 umbrella organisations in the building and real estate industries are appealing loudly for government help in the face of a complete collapse of the construction sector.

The ifo-Institut think-tank reported at the end of the year that the number of cancellations of building projects was now affecting 16.7% of all builders in November, up from 14.5% in October. Expectations for 2023 were now plummeting, and were now at the lowest level since ifo started tracking the sector in 1991. The number of companies reporting liquidity problems had risen dramatically, said the ifo-Institut.

The cost of building a conventionally-built residential property rose nearly 17% in November, compared to a year earlier. Between August and November, prices alone rose 2.5%. The highest year-on-year increase was measured in May, at 17.6%.

And it's not just residential property. The costs of building a new office property rose by 17.8%, and for other commercial properties by 17.6%. Tim-Oliver Müller, the head of nationwide building association HDB, said the highest rate of cancellations was in the residential sector - probably because of the direct impact on individuals faced with much higher interest rates, increased cost of living, and the higher cost of any new-build homes. Müller warned last month that many of the HDB members were now "struggling to survive due to rising building material and energy prices".

Among input prices for residential buildings, concrete work increased in price particularly sharply, by 17.6%, masonry work by 13.6%, roofing and waterproofing by 20.3%; carpentry and timber construction increased by only 5.1%, while prices for finishing work jumped by 17.8%.

ifo-Institut researcher Felix Leiss said that 50.6% of developers surveyed planned to raise their prices this year. "Despite already weakened demand, many firms must rely on further price increases to pass on high material and fuel costs to customers. Construction prices continue to rise," he said.

Thomas Reimann, vice-president of the Federation of Business Associations in the state of Hesse, pointed to the rise of costs in his own state (which includes Frankfurt am Main). The cost of construction has risen by 40% since 2015, he said, of which half was attributable to the years 2021 and 2022. Interestingly, he pointed to the cost of earth removal as being a major price driver, with costs having risen by 61% by 2015.

"More and more transport routes for excavated earth, all the way to other federal states, are making construction more expensive and polluting the climate. Regulations for the analysis of excavated earth that are far removed from practice make disposal even more expensive. This is a home-grown disposal problem which must finally be addressed," he said.

This may be a particular German problem, but across the eurozone the construction sector is at its lowest point since the onset of the coronavirus pandemic brought the economy to a near-standstill in April to June 2020. The December S&P Global Eurozone construction purchasing managers' index fell to 42.6, down from 43.6 in November, where figures below 50 show declining activity. It marked the eighth month in a row of a contraction in home building, and apart from during the COVID lockdowns, saw total home-building activity plunging at the sharpest rate since March 2013, while new orders for all construction projects saw the fastest decline since September 2014, says S&P. In both cases the biggest falls in the 20-nation eurozone bloc were in Germany.

Commercial building also saw its ninth monthly fall in succession, although in November the biggest fall was in France. Overall construction typically represents about 9% of eurozone output, hence the surge in shrinking order books does not augur well for the eurozone's overall economy in the coming months.