NewsGerman construction crisis: Bleak 2024 outlook for industry with potential silver lining for housing market

German construction crisis: Bleak 2024 outlook for industry with potential silver lining for housing market

The German construction industry is in terrible condition.
The German construction industry is in terrible condition.
Images source: © Getty Images | Bloomberg
7:28 PM EST, January 14, 2024

2024 could mark a significant downturn for the German construction industry. The Institute for Economic Research (DIW) and the Institute for Economic Research (IFO) have released data that indicates a looming construction crisis that could potentially escalate to catastrophic dimensions.

German construction industry teetering on the brink

First, the economic situation in the construction industry has plummeted to its lowest recorded value. As per the IFO Institute, it was at -56.8 points in December, marking the worst result since 1991, when this analysis was initiated. Second, expenditure on residential construction is predicted to decrease by 3.4% this year. This reduction is expected to widen the housing gap, which is already 550,000 units in Germany.

"The extremely bleak expectations suggest that construction companies have lost all hope. The outlook for 2024 seems very grim," commented Klaus Wohlrabe, an IFO analyst quoted by Business Insider, on these findings.

Survey results from 500 residential construction-specialized companies further point towards this grim reality - more than half of the companies surveyed are struggling due to insufficient orders.

The director of the German Construction Industry Association affirms the severity of the problem. He thinks the federal budget will most likely not allocate additional funds for residential construction development. This implies that despite apartments are scarce for sale, their availability on the market is most likely going to reduce in many cities.

The German Institute for Economic Research (DIW) holds a similar bleak forecast.

"This year, the volume of construction is expected to fall even more than the previous year," warn the experts.

They underline that the forecasts for 2025 also appear rather dismal.

Industry's misplaced hope on continued low interest rates

The issues plaguing the German construction industry stem primarily from excessively optimistic assumptions. In an interview with "Die Welt," Uwe Schmitz, CEO of property developer Frankonia, revealed that many in the industry were banking on the assumption of low-interest rates persisting for years. However, a swift inflation spike made central banks take drastic measures. This, along with rising labor and material costs, escalated prices.

"The market for affordable rental apartments, where the average earner ideally should not spend more than 30% of their income, is practically non-existent," he stated.

Uwe Schmitz further highlighted that these industry problems would decrease tax revenues.

A series of bankruptcies corroborate the construction industry's struggles. The change in the economic landscape, specifically low interest rates for years, which, like in Poland, fueled a property boom, caused a sharp decline in apartment demand due to high interest rates and costs.

Last autumn, Michael Voigtländer, a real estate expert at the German Economic Institute, cautioned that some companies "are selling only a tenth of what they generated a few years ago".

Burst bubble leading to falling prices

For consumers, falling prices are a potentially ironic silver lining to the current market situation. The Pekao Bank's analysis indicates that the housing market experienced a "bubble effect" until 2022, largely influenced by zero interest rates.

In response to the European Central Bank's decision to hike interest rates to 4.5%, the German property market is now witnessing a significant dip. Failures of construction companies and subsequent employment cuts in the industry have caused property prices to plummet.

In the third quarter of 2023, Germany's prices fell by 10.2% compared to that same period the previous year. However, the fall was steeper (nearly 13% for single and two-family houses, and over 9% for apartments) when the range was narrowed to the most popular properties in the most significant German cities.

According to Konstantin Kholodin from the German Institute for Economic Research in an interview with Reuters, the German property market is undergoing significant transformations.

"In Germany, until 2022, we were witnessing a huge speculative bubble, one of the largest in the past half-century. However, prices are now falling, and the bubble has burst," he stated.

The housing market scenario has a political dimension, too. Chancellor Olaf Scholz pledged to bridge the housing gap. The housing construction rate was to reach 400,000 per year. The latest predictions suggest this commitment will not be fulfilled remotely by 2024.

During a recent appearance on the "Newsroom" program, investor and real estate market analyst Tomasz Narkun confirmed that the situation in Germany is unprecedented.

- Germany is witnessing the most severe construction recession of this century. The key issue there is the cost problem. Construction costs have skyrocketed, and the market cannot adjust to these price levels. I fear we might face a similar scenario in Poland," he pointed out.

"Construction has been drastically curtailed by developers as it's simply not profitable for them to build. The market, owing to high interest rates, has reached a tipping point in terms of purchasing power. And as soon as this happened, everything fell apart. Nothing is selling," he elaborated.

A relief for German housing?

The German construction industry is eager for the government to introduce memorable credit lines to stimulate the housing market. The Kreditanstalt für Wiederaufbau, or the Reconstruction Bank, could undertake such actions in this regard.

"The KfW should initiate affordable programs to offset the problem of high interest rates. This could give the beleaguered housing industry the push it needs to return to the right track," suggested Dr. Andreas Mattner, President of the industry organization Zentraler Immobilien Ausschuss in a quote by Bloomberg.

However, presently, there are no plans in action to introduce such preferential loans.

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