Boom in construction industry hampered by capacity bottlenecks

While Germany may be experiencing a mild slowdown in its economic growth, including in its construction industry, a new study shows that building costs are still rising inexorably, which is bad news for consumers.

The study “Hochbau-Prognose 2019” by consultancy group EY Parthenon, shows that overall building costs are still rising much faster than the rate of inflation, which will add fuel to the fire of protests about the rising cost of existing and new housing, and associated rents.

Last year the German residential construction industry saw an overall rise in volume, adjusted for inflation, of 2.9% - largely due to a strong level of new residential construction as well as favourable weather. Commercial project developers in particular invested a lot of money in multi-storey residential housing, but municipalities and private companies invested more in offices, schools and factories.

The EY Parthenon study expects this volume (not including road, rail and tunnel construction) to fall in the coming years. While this year the volume of construction activity including renovations for new and existing buildings is expected to rise by 2.3%, thanks to low interest rates and heavy demand for property, next year this is forecast to fall to 1.6%, and then 0.9% in 2021.

Capacity bottlenecks are part of the problem. According to Axel Schäfer, partner at EY Parthenon, “The construction industry just cannot work off the existing overhang of orders fast enough due to capacity bottlenecks.” Companies are working at fuller capacity than they were at the height of the post-re-unification boom, he says. The shortage of available building land in the big cities is adding to the problem.

Companies are also having difficulties finding qualified workers. It takes about six months to fill positions in sanitation, heating and air conditioning, which pushes up prices. Last year the building costs for new housing rose by 4.5%, while costs for renovation rose 4%. “Given the growing order books, further price rises in the coming years are to be expected”, said Schäfer. The government initiative of Kindergeld, a subsidy for families with children to buy their own homes, is likely to further fuel demand.

Despite the government falling way short on its residential housebuilding targets of 375,000 new units annually, the building industry has been riding a wave over the past few years. In 2018 the overall building volume rose by 11% to €127bn, while this year it is likely to grow by a further 6% in volume terms.

According to figures from the Federal Statistics Office (Destatis), the turnover in the construction industry in January 2019 were 6.2% higher than in January 2018, while the industry employed 2.8% more workers than a year previously.

The EY Parthenon study pitches for more intense usage of modular building and digitalization to save time and money. With centrally designed and constructed building modules which are pieced together on site, building projects can be shortened by between two and five months, and the costs reduced by 5% - 10%. The industry’s slow take-up of digitalization is also criticized in the report, as lagging well behind other industries.