Germany's construction ministers meet to tackle country’s building crisis

Germany’s state construction ministers met in Baden-Baden last week to lockdown the budget and tackle the country’s escalating building crisis, which is being exacerbated by a lack of uniform standards as the industry hits ‘rock bottom’.

Speeding up approval procedures in residential construction to three months, enabling standardised construction throughout Germany and allowing residential buildings to be extended without approval all came under the microscope: ‘We need to finally get out of the bureaucracy that paralyzes everything,’ warned Axel Gedaschko, President of the German Housing Industry Association (GdW). This would save costs and have a positive effect on rent levels.

Building laws are typically decided on by the 16 federal states rather than on a national level and uniform standards remain something of a pipe dream. However, the pressing need to improve this is clear: While 750,000 apartments were estimated to be missing by 2025 at the beginning of 2023, a gap of 750,000 is now expected for the year after next, according to the German Property Federation (ZIA). According to their forecast, there could be a shortfall of up to 830,000 apartments by 2027. As ZIA President Dr. Andreas Mattner put it: ‘Sufficient housing is essential for coexistence.’

Chancellor Olaf Scholz recently commented on serial construction, saying that car manufacturers do not approve each model individually in each state, but that there is a general approval. ‘Why shouldn't we be able to do the same with the basic construction of houses throughout Germany? That would save considerable costs. Does Germany really need such different structures in the state building regulations? I don't think so,’ he said.

Construction industry expected to shrink by 4.4% this year

The construction industry in Germany is expected to shrink by 4.4% in real terms this year, reflecting the weak economic backdrop, with subdued investor and consumer confidence, high inflation and rising interest rates. The drop in 2023 follows two successive years of decline in construction output, with contractions of 2.2% in 2022 and 1.4% in 2021. The residential sector is in a particularly weak position, with high construction costs and rising interest rates compounding the sector's underlying weakness.

‘The market is at rock bottom,’ Chairwoman of the Conference of Building Ministers (BMK), Nicole Razavi (CDU), told reporters ahead of the start of the two-day consultations. ‘We need measures that will restore the economic viability of new builds and refurbishments as quickly as possible and halt the negative trend.’

Germany’s wave of cancellations in residential construction continues. In October, 22.2% of companies reported cancelled projects, up from 21.4% the previous month, according to the ifo institute. ‘It’s getting worse all the time, with more and more projects failing due to higher interest rates and elevated construction prices,’ said Klaus Wohlrabe, head of surveys at ifo. ‘In residential construction, new business remains very low and companies’ order backlogs are diminishing.’

Last month (October), 48.7% of companies reported a lack of orders, up from 46.6% in September. A year ago, in October 2022, that figure was 18.7%. ‘Nearly half of all residential construction companies are now suffering from a lack of orders, and that number is growing every month,’ Wohlrabe warned. ‘The situation is putting several companies under threat, with one in ten having already reported financial difficulties. The outlook for the residential construction industry remains bleak as companies brace themselves for hard times.’ Expectations reached an exceptional low of -63.9 points.

‘House builders and the industry are now expecting tangible results’

The ZIA would like to see a reduction or temporary suspension of the land transfer tax as a ‘core prerequisite for a genuine reanimation of residential construction’, said ZIA President Mattner. ‘If this initial spark is provided, the important simplifications that make planning and building faster and cheaper can take effect.’ Felix Pakleppa, managing director of the ZDB, agrees: ‘House builders and the industry are now expecting tangible results,’ he said, warning that the Conference of Building Ministers should be aware of its responsibility and its opportunities to create clarity about the framework conditions next year. ‘Otherwise, we risk not building more than 250,000 homes in 2024 and even fewer in 2025. If the slump in residential construction continues unabated, we face a wave of insolvencies next year and the loss of 100,000 jobs.’

According to the Federal Statistical Office (Destatis), the average construction cost index for residential buildings rose by 13.4% in 2022, due to a rise in the prices of both materials and labour. The government will miss its target of building 400,000 new apartments every year, including this year, unless something radical changes.

Following last week’s conference and in view of ongoing discussions about a necessary financial reorganization in Germany, the ZIA has called for the debate on the future distribution of funds to focus on core areas of public services: ‘In the nationwide tussle, it is now more important than ever to focus on the essentials,’ warned ZIA President Mattner, comparing the situation to an American budget lockdown. ‘In such a tense situation, the real estate industry does not expect politicians to support us with horrendous old-school extra subsidies,’ he said. ‘All the more reason for us to trust that politicians will now remove the obstacles that are hampering investment as quickly as possible and, at the same time, keep their promises.’  In doing so, ‘intelligent measures’ should be supported that ‘pay for themselves in a timely manner and return money to the state coffers through tax revenue’, he said.

Serial construction at heart of ‘Construction Turbo Pact’

Last week’s talks were based on the ‘Construction Turbo Pact’, which was concluded by the federal and state governments at the beginning of November. The housing summit held by Chancellor Olaf Scholz and Federal Building Minister Klara Geywitz (both SPD) in the autumn had not met expectations. Earlier this month, the GdW and the Federation of the German Construction Industry, together with Geywitz, presented a framework agreement for fast, cost-effective housing construction using serial production methods.

Planning and approval can be accelerated ‘by the federal states greatly simplifying and standardizing the legal requirements’, said Geywitz. Previously, construction companies had to submit separate construction plans in each federal state. Thanks to uniform specifications, planning and construction could be faster throughout Germany, including in serial and modular production.

Chancellor Scholz and the prime ministers had previously agreed in Berlin on a package of legal changes that are intended to ensure that wind turbines, power lines, railway lines and apartments are built more quickly and bureaucratic and legal hurdles should be reduced. According to the Chancellery’s wishes, the package should be the centerpiece of the Germany Pact pushed forward by Scholz. Two months ago, the Chancellor proposed such cooperation to the states and the ‘democratic opposition’ to modernize the country. In the last few decades, the federal and state governments have invented more and more restrictive regulations, Scholz said. According to Scholz, the package includes around 100 individual regulations regarding the construction of apartments, motorways, train routes, wind turbines and the installation of cell phone masts, among others. The Chancellor announced that additional simplifications in the hydrogen industry and healthcare sector should follow.

Ultimately, the benefits of a buoyant housing market have far-reaching social benefits, as Mattner points out, citing ‘greater social cohesion, additional tax revenue from construction activities and savings on transfer costs incurred when struggling construction companies are unable to retain employees’.