Germany’s residential construction sector is currently grappling with a myriad of challenges that are seemingly pushing it to its limits. The industry is experiencing a significant slowdown in new orders, an increase in cancellations, and a surge in construction costs. This situation has been exacerbated by a lack of skilled labour, rising material and energy prices, and the impact of geopolitical tensions on the supply chain.
According to the IFO Institute, approximately 22% of German companies reported cancelled orders in October, a slight increase from 21.4% in September. Furthermore, 48.7% of firms stated that they were facing a shortage of new orders in October, up from 46.6% in September. This trend has resulted in a decline in new orders for the twentieth consecutive month as of October 2023.
The HCOB Germany construction PMI fell to a three-year low in October, reaching 38.3 from 39.3 in September. This decline was primarily driven by the most rapid decrease in German residential projects since 1999. These figures cast doubt on German Chancellor Olaf Scholz’s ambitious goal of constructing 400,000 new homes annually.
Dr. Klaus Wohlrabe, head of surveys at the IFO Center, stated, “The situation is deteriorating progressively, with an increasing number of projects failing due to rising interest rates and escalating construction costs.”
The European Construction Industry Federation has reported that 81% of companies are also being threatened by escalating material and energy prices in 2023, specifically within Germany. Additionally, 67% of companies have pointed out a lack of skilled workers, while 58% have expressed concerns about low overall demand.
The German construction sector witnessed an upward trend in 2020 and 2021, but this came to an abrupt halt in 2022. Major central banks such as the US Federal Reserve, the European Central Bank and the Bank of England have consistently raised interest rates to combat high inflation. This has particularly affected the German housebuilding industry, leading to a rapid rise in construction mortgage interest rates in 2022, from 1.4% to 3.5%, especially for contracts exceeding ten years.
Construction costs have also been increasing, with raw material prices soaring in the aftermath of the Russia-Ukraine conflict. This has been due to a significant shortage of key materials as a result of international sanctions imposed on Russia, including Australia’s bauxite export ban, which severely impacted Russia’s aluminium sector.
These circumstances have primarily affected industrial metal prices such as aluminium, copper, nickel and steel, with other materials like wood, concrete, insulating materials and screws following suit. Other factors such as rising oil prices and rebounding industrial demand due to the easing of Covid-19 restrictions have also contributed to the ongoing increase in raw material costs.
The German construction sector has also seen a slower increase in employment compared to the overall economy, with an increase of only 0.5% in 2022, while broader employment growth was 1.3%. This lack of activity has compelled companies to lay off more workers or hire temporary, seasonal workers.
Germany had initially introduced tighter regulations concerning energy-efficient housing with the new EH 40 standard. This included stimulus measures for the construction of better energy-efficient new housing worth about €1.1 billion. However, these measures were quickly withdrawn following backlash from builders who suspended or postponed new constructions in several locations.
Germany is currently facing a challenging outlook for the coming months as companies expect weak demand to persist. Another risk is that once the backlog of orders is cleared, companies may be left with fewer, high-cost projects, further eroding profits. This will also make it harder to invest in more growth and expansion opportunities, with very little disposable capital available.
Despite these challenges, Germany is trying to implement new measures to simplify the permit and planning processes, reduce paperwork and bureaucracy, and extend more financial support to construction companies affected by higher energy costs. However, the effectiveness of these stimulus and support measures in propping up the economy remains to be seen.
In conclusion, the German residential construction sector is currently facing significant struggles amid rising costs. However, with strategic planning and the implementation of supportive measures, there is hope that the industry can navigate these challenges and continue to contribute significantly to Germany’s economy.