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Germany’s residential construction sector, once a pillar of strength in the national economy, remains stuck in a significant slump. With over half of the companies in a recent Ifo survey reporting a troubling lack of orders, and project cancellations remaining stubbornly high, the industry is now really sounding the alarm.
According to the Ifo economic survey, a stark 55.2% of firms faced order shortages as of April 2024, a slight improvement from March's 56.2%, but hardly a cause for celebration. The question now looms: at this point, how can the construction industry claw its way back?
ifo
Dr. Klaus Wohlrabe, Head of Surveys, ifo Institute
The construction sector's fickleness is well-known, yet recent data indicate disruptions that go beyond ordinary fluctuations. Klaus Wohlrabe, the head of Ifo Surveys, notes, 'Housebuilders are desperate for hopeful signs, yet the crisis seems endless.' Highlighted in the Ifo survey, an alarming one in five companies continues to report cancelled projects, a critical bottleneck stifling new development.
The pinch is felt across the board, from local contractors to major developers, and it’s putting a serious damper on Germany’s ability to meet its housing needs. The government’s putative target of 400,000 new apartments per year has now been effectively abandoned, with projections suggesting only 225,000 completions in 2024. It’s a shortfall that's pushing rents upwards and straining already tight housing markets, particularly in major cities.
Material costs and higher interest rates the problem
Deeply embedded in economic and policy frameworks, the crisis has its roots. Skyrocketing material costs, further exacerbated by global supply chain disruptions, along with surging interest rates, have scared off many potential developers and investors. The Federal Statistical Office reports a continued decline in building permits, which have dropped 18.3% year-over-year as of February.
BFW/Weilong Hao
Dirk Salewski, President, BFW
On the political front, the construction industry's struggles are fueling heated debates. The industry’s significant contribution to GDP and employment makes it a hot-button issue, particularly as political factions spar over solutions. "We want to build, but only with affordable, reasonable standards can housing construction maintain its potential for the economy," argues Dirk Salewski, President of the Federal Association of Independent Property and Housing Companies.
Combating the downturn
To tackle the downturn head-on, industry leaders and policymakers advocate a dual strategy: injecting financial resources and streamlining regulatory standards.
Financial Infusions: Billions in subsidies are being called for, aimed at kick-starting projects by making them financially viable again. These funds could support the creation of both social and affordable housing, thereby addressing the housing shortage head-on.
Simplification of Standards: There’s a growing chorus demanding a cut through the red tape that many believe is strangling the sector. The proposed "building type E" for simpler, more experimental projects could potentially lower costs and speed up construction timelines.
Klara Geywitz, the Federal Building Minister, emphasized the need for streamlined standards at the recent Housing Construction Day in Berlin which we reported on in REFIRE, noting, "If we start canceling individual standards, we'll be dealing with them for the next 50 years."
For investors, the tumultuous market presents a landscape of risk and opportunity. Those with an appetite for engagement could find valuable entry points, particularly if they’re willing to navigate the complex interplay of economic slowdown and potential governmental interventions. Engaging now, especially in projects aligned with potential subsidies and new regulatory frameworks, could position investors favorably if the market rebounds. (See our recent article in REFIRE, a guest column by H2i's Dr. Tilman Hickl on EOF - einkommensorientierte Förderung - and regional investment opportunities)
More than a cyclical dip
The residential construction sector’s current predicament is more than a cyclical dip; it’s a clarion call for substantive changes in how Germany builds its future. With comprehensive policy reform and strategic investment, there’s hope to not only revive the construction industry but also to alleviate the broader housing crisis.
The construction sector's recovery is crucial, not just for the economy but for the thousands of Germans struggling to find affordable housing. As the sector looks to rebuild, it will need more than just concrete and steel—it will need resilient strategies and a commitment to sustainable growth.
