No respite this year from gloomy residential building outlook

The dramatic collapse in German housebuilding was an ever-present theme in discussions at the MIPIM in Cannes in March. Not just housebuilding, but fresh figures for the total construction industry show the industry suffering its worst start to the year in 14 years, back to the heart of the financial crisis in 2009, when the January decline hit 21.8%.

A few statistics. This year's new business in January for total construction was 5.8% weaker than in December, and fully 21% down on orders over the same month last year. Last year, orders for residential construction for the year fell by fully 16.5% in real terms compared to 2021.

Tim-Oliver Müller, CEO of the main construction industry association HDB, said: "Investors are putting the brakes on construction at the beginning of the year. The sharp increases in prices and interest rates have added to the uncertainty." He added that the "shock rigidity" would have to ease back soon, as the order backlogs would not last long enough to keep companies occupied.

Turnover is now being seriously affected. In January, turnover in the broad industry was down 8.3% year-on-year. At the end of 2022 it was 4.5% lower in real terms over the previous 12-month period, a reduction of €68.3bn, not adjusted for inflation. In residential construction it plunged by 9.3%, with the trend accelerating.

The Munich-based Ifo-Institute's widely-tracked Business Expectations Index for residential construction for February fell to minus 65.6 points, the lowest value since the survey began in 1991, fully thirty-two years ago. "Fear is sweeping the residential construction sector", said Ifo researcher Felix Leiss bluntly. The degree of cancelled housing construction orders by company was 14.3%, its highest ever. By comparison, in the years 2012 to 2019, just before Covid, the amount of companies reporting cancellations did not exceed 3% even once.

The number of new building permits for apartments likewise slumped in January by the most in almost 16 years, due to rising costs. Only 21,900 dwellings were approved in January, 26% or 7,700 fewer than a year earlier, according to the Federal Statistics Office. This was the ninth decline in a row, and the biggest drop since April 2007.

"Companies are still reducing order backlogs. But the signs are pointing to a real storm coming," commented Felix Pakleppa, CEO of the Central Association of the German Construction Industry (ZDB), on the federal statistics. Should the critical situation in residential construction intensify, and orders continue to plummet, it will become more difficult for tenants in large cities and the industry layoffs will become inevitable, he said.

According to the ZDB's own statistics, the pace of the decline in orders intensified in December 2022 compared to December 2021; orders in residential construction fell by 21% in nominal terms in this period, and 32% in real terms.

"The amount of building permits applied for does not give us more confidence for the outlook over the next few months," said Pakleppa. The starting point for any recovery, he said, would be for the government to radically overhaul its subsidy policy to encourage builders to start new projects. One key area is the special depreciation allowance (Sonder-Afa) in rental housing construction and the KfW subsidy programme linked to the EH40 building standard, which actually counteract each other, creating a situation where the issue of building permits does not actually lead to buildings being built, he said.

Pakleppa's organisation is now assuming that only 280,000 dwellings were completed in 2022 (the official figures are not due out until May), and will barely reach 245,000 units in 2023, a reduction of 12.5%. It's a far cry from the federal government's now-abandoned fantasy figure of the 400,000 new units required annually to keep up with demand. The Bundesbauministerin, Frau Klara Geywitz, has now shifted her stance to trying to get close to this figure "through prefabrication and digitalisation".

Even the Bundesbank admitted that this will be a bad year for residential housing construction. "There is a bit of a perfect storm coming together" said the bank's chief economist Jens Ulbrich in a recent note, with private residential construction remaining the weak point in Germany's overall economic development this year. Among other causes for the slump, Ulbrich pointed to rising interest rates, declines in disposable income, higher inflation and high energy prices.

In its spring report, the Bundesbank researchers refer to rising financing costs due to higher interest rates and high price increases for building materials. "The cost-increasing challenges of residential construction will be expressed primarily from 2024 onwards in declining approval and new construction figures," the report states. A gloomy outlook indeed.