Housing construction in Germany is heading towards a dangerous cycle: Due to the current slump in construction activity, an increasing number of construction companies are reporting financial difficulties, as the Munich Ifo Institute reported on Tuesday. If the industry’s capacities shrink, this would become an obstacle to future revival, according to the Ifo economic expert.

“Cancellations in residential construction are piling up to a new high,” said Wohlrabe. In August, 20.7 percent of construction companies reported canceled orders, and 44.2 percent of companies reported a lack of new orders.

There is huge uncertainty in the market

“We have not observed anything comparable since the survey began in 1991. The uncertainty in the market is huge,” said Wohlrabe about the cancellations. “That’s bitter: every apartment that isn’t ordered today won’t be available tomorrow,” comments Tim-Oliver Müller, managing director of the Main Association of the German Construction Industry.

The majority of companies feared further declines in business over the next six months. “If this drags on for a longer period of time and many companies leave the market because they go bankrupt, there would then be a lack of capacity to achieve the housing construction goals, even if the general conditions are good,” said Ifo scientist Wohlrabe. “This is a medium-term risk.”

Demographic shift is causing problems for the construction industry

Like other sectors of the economy, the German construction industry is facing a demographic downturn this decade because many older workers are retiring. The worse the situation in construction, the lower the tendency to hire new staff – and thus the capacity in the future.

The federal government’s goal is 400,000 new apartments per year. According to consensus estimates, this was already a long way off. But things could get even worse: “We will complete around 240,000 apartments this year because we are working through the order backlog,” estimates construction industry managing director Müller. “We expect the big dent next year, when there is a risk of falling well below 200,000 apartments.”

Simultaneous increase in construction costs and interest

A main cause of the malaise is the simultaneous increase in construction costs and interest rates, which makes many construction projects unprofitable. “Some companies are already up to their necks in water,” said Wohlrabe. “Currently, 11.9 percent of housing construction companies are reporting financing difficulties. This is the highest figure in over 30 years.”

There is a consensus in the construction and housing industry that German politics plays a major role in making construction more expensive, be it the tightening of energy saving requirements and fire protection or the new heating law. “On the one hand, more and more regulation is making building, renovating, maintaining and managing more and more complex and therefore more expensive,” says Axel Gedaschko, President of the Federal Association of German Housing and Real Estate Companies (GdW).

Shortage of 700,000 apartments expected by 2025

“Behind this are social demands that are taken up politically. On the other hand, increasing regulation is intended to prevent rising costs from overburdening private households.” There are also social demands behind this. “Both are understandable in this matter, but are no longer compatible,” criticizes the GdW President.

“Every month there is new bad news. A change in interest rates is not expected for a longer period of time.” According to the association’s assessment, the development will become significantly worse in 2024 and 2025. “A shortfall of 700,000 apartments is expected for 2025 if political countermeasures are not taken very quickly,” says Gedaschko. The GdW expects 214,000 new apartments for 2024 and is therefore only marginally more optimistic than the construction industry.

Housing construction summit in the Chancellery at the end of September

A housing construction summit is planned for the end of September in the Berlin Chancellery. The construction industry is calling for a large construction package that is intended to avert the threat of a long-term crisis – and would probably financially eclipse everything that the federal governments have spent on housing construction in the past decades: These include, among other things, a massive expansion of interest rate reductions, the streamlining of… Building standards, a “special fund” for public housing companies and the temporary suspension of real estate transfer tax.