A residential construction site on the Elbe dike near downtown Wittenberg.
Soeren Stache | Picture Alliance | Getty Images
Even before his term as Chancellor, the German politician Olaf Scholz had set himself the goal of building 400,000 new apartments every year.
Two years later, German housing construction appears to be collapsing, putting pressure on both its elusive target and the country’s overall economy.
Companies are canceling housing projects, order numbers are falling and the outlook for the industry appears bleak, according to a report published last week by the Ifo Institute for Economic Research.
Over 22% of the companies surveyed reported the cancellation of housing construction projects in Germany in October, a new record. Meanwhile, 48.7% said there was a lack of orders – compared to 46.6% last month and 18.7% a year ago.
Expectations for the housing construction industry fell to what the Ifo described as “extraordinarily low” lows. And that’s not the only data set that’s causing concern among observers.
Hamburg Commercial Bank’s latest construction PMI survey for Germany fell to its lowest level in three and a half years at 38.3, also down from September.
“Things are getting worse and worse in the German construction sector. The real estate sector is the epicenter of the downturn and is falling at breakneck speed,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, in a press release.
The data on building permits also paint a weak picture. According to the Federal Statistical Office, 28.3% fewer building permits were issued between January and August than in the same period in 2022.
According to the data, just 175,500 permits were granted in the first eight months of the year, suggesting the government is on track to miss its target of 400,000 new homes. Fewer than 250,000 are likely to be built this year, Carsten Brzeski, global head of macro research and chief economist for Germany at ING, told CNBC.
“The first victim of higher interest rates”
Higher interest rates contributed significantly to the industry’s downward trend, Brzeski said.
“The housing or construction industry is the first victim of higher interest rates,” he said, pointing out that increased material and energy costs as well as overall financing costs were the main reasons for the collapse.
Similar to many central banks around the world, the European Central Bank has raised interest rates to ease inflationary pressures. The ECB left interest rates unchanged at 4% at its meeting last month, after making 10 consecutive hikes.
Klaus Wohlrabe, head of the Ifo surveys, said that in addition to higher tariffs and materials, cuts in housing subsidies had caused additional pressure.
“All three points taken together make it impossible for many private consumers to build a home,” he told CNBC.
“Bad news” for the economy
And the current situation is just the beginning, say the experts.
“The situation will worsen next year when all order books will be empty, developers will be faced with expensive projects and demand will not pick up quickly enough,” Brzeski explained.
Wohlrabe agrees that 2024 could bring further difficulties.
“Many companies are currently relying on the order backlog. But the gap between current construction production and incoming orders is growing. This makes a decline in 2024 more likely,” he said.
And with the construction industry accounting for around 7% of Germany’s GDP, such a decline could put pressure on economic growth, he added.
This comes as concerns about the state of the German economy have increased throughout the year after it fell into a technical recession in the first quarter of 2023. In its latest forecast, the European Commission said it expects economic activity in Germany to contract this year before rebounding in 2024, albeit at lower levels than previously expected.
But the labor market could also be affected by the problems in the housing sector, noted Brzeski.
“It is a clear signal that the current stagnant economy could easily become an economy in recession with rising unemployment,” he said.
Last week, the federal government announced new measures aimed at speeding up planning and approval processes for construction work and reducing bureaucracy. In addition, financial relief was announced for companies with high electricity costs.
However, experts are not entirely convinced that the measures will ease the housing crisis in Germany, and neither Brzeski nor Wohlrabe see the measures as a clear solution.
While Brzeski is convinced the measures could at least help smooth the downturn, Wohlrabe fears more long-term problems could develop if key issues such as financing costs are not addressed.
If the crisis lasts too long, machines and personnel capacities could decline and would then be missing when the industry recovers, said Wohlrabe, adding that this could then have a “dampening effect” overall.