Expensive materials, higher interest rates and many canceled projects: the German construction industry is warning of a slump in residential construction and is demanding support from politicians. In previous crises, such as the corona pandemic and the global financial crisis, the federal government made large state investments. “When, if not now, does politics want to invest in construction?” Felix Pakleppa, general manager of the Central Association of the German Construction Industry (ZDB), told the German Press Agency.
Since 2015, the population in Germany has grown by around three million people, many of them from Syria, Afghanistan and Ukraine. They all need housing. In this situation, the Ministry of Economics drastically reduced the KfW new building subsidy for 2023 to one billion euros, criticized Pakleppa. For comparison: Until the end of November 2022, KfW approved EUR 16.4 billion for newly built residential buildings.
Strict efficiency house standard and seal of quality
In January, the Federal Ministry of Economics prematurely ended grants from the KfW development bank for energy-efficient construction and renovation due to a flood of applications. The program was continued in the spring and stopped shortly thereafter because the money was quickly exhausted. Since then, funds have only been available for new buildings that meet the strict efficiency house standard 40 and have a seal of quality for sustainable building.
In the future, the refurbishment of existing buildings in particular is to be subsidised, since according to the ministry the climate protection effect is much greater than in new buildings. In a later step, the new building subsidy for 2023 is to be fundamentally redesigned. EH40 means that a building uses only 40 percent of the energy that a standard home uses.
ZDB President Reinhard Quast called for new construction subsidies not to be reduced and planned special depreciation for residential construction not to be linked to the EH40 standard. “Builders and construction companies are increasingly groaning under the political guidelines in the area of sustainability.” It is hardly possible to build cheaply. “A square meter in residential construction costs around 4,000 euros. It doesn’t go below that.”
The ZDB, which represents around 35,000 medium-sized construction companies, proposed an extension of the special depreciation for new rental apartments. “If it were possible to depreciate every apartment over ten years instead of the two percent that is currently the case at ten percent, that would give a strong boost to housing construction,” said Quast. For the state, however, this would mean billions in tax losses.
High construction costs and higher interest rates
The construction industry is particularly concerned that many residential construction projects are being canceled because they are too expensive due to high construction costs and higher interest rates. According to the Ifo Institute, 16.7 percent of construction companies were affected by cancellations in November. In previous years it was only one to two percent, said Pakleppa. Building permits also collapsed in the fall.
The ZDB expects that only 245,000 apartments will be completed in the coming year, around 12 percent less than forecast this year (around 280,000). The former goal of the federal government of 400,000 new apartments per year would thus be missed by far. A tight supply of housing increases the pressure on real estate prices and rents.
After strong increases in construction prices, Quast sees at least some relaxation for builders. While construction prices rose by a good 15 percent this year, the ZDB expects a smaller increase of 5.5 percent in 2023. “We’ve peaked for some materials,” said Quast. Wood and steel have become somewhat cheaper, although significantly more expensive than a few years ago. The situation has also eased somewhat for glass and ceramics. Quast expects higher construction prices in the medium term, also due to rising wages for construction workers.
Golden times are over for the time being
The construction industry was a pillar of the German economy for a long time and has earned well thanks to the real estate boom. Now the golden days are over for the time being: The ZDB expects the industry turnover to drop by 7 percent in the coming year, adjusted for price.
However, the strategy consultancy EY-Parthenon does not assess the prospects in building construction as bad. Despite all the hurdles, the volume of construction work performed will increase slightly this year, adjusted for price. Construction companies could largely pass on higher prices to customers. After stagnating next year, building construction will pick up again as early as 2024, says EY Parthenon. The Ifo Institute counts the construction industry among the “inflation winners”. In construction, among other things, companies have increased prices significantly more than was to be expected due to higher wholesale prices alone.
ZDB President Quast sees other challenges in addition to housing construction. While the federal government wants to invest billions in infrastructure, there is often a lack of money for public construction contracts, especially in the municipalities. “There is an investment gap of 150 billion euros in the construction of schools, day-care centers and hospitals.” In addition, approvals take a long time because there is a lack of staff in the offices.
Managing Director Pakleppa also expects increasing delays in the building permits. The background is the recent housing benefit reform. “We have signals that officials in the building departments will be withdrawn to process the expected increase in applications for housing benefit.”
