Construction: Housing crisis likely to worsen in 2024

Economists and the construction industry expect a continued decline in residential construction in the new year.

Construction: Housing crisis likely to worsen in 2024

Economists and the construction industry expect a continued decline in residential construction in the new year. The Munich Ifo Institute estimates that only 225,000 apartments could be completed in 2024, 45,000 fewer than last year. The most important industry associations are also pessimistic: the Main Association of the German Construction Industry and the Central Association of the German Construction Industry, even if the respective forecast figures differ somewhat.

Economist expects low prices for single-family homes

Ifo economist Ludwig Dorffmeister assumes that 70,000 new single- and two-family houses will be completed in 2024, which would be a new all-German low after 2009. "Multi-family house construction, including dormitories, is holding up better with 125,000 newly built residential units." According to Ifo estimates, around 25,000 more new apartments were built in multi-family houses in 2023.

And ultimately, according to the Ifo forecast, a further 30,000 apartments could be built in existing houses and non-residential buildings in 2024, which in total would then result in the 225,000 mentioned by Dorffmeister.

DZ Bank - the central institution of German cooperative banks - also assumes that the downward trend will continue to accelerate: As a result of the construction crisis, annual completions could fall to 200,000 apartments by 2025, according to the recently published forecast.

The federal government's political goal is 400,000 new apartments per year. Many experts considered this number to be bold in better times, but it is now considered unattainable.

Construction associations are also pessimistic

“We are looking ahead to the coming year with concerns; residential construction in particular is clouding the outlook,” said Tim-Oliver Müller, general manager of the construction industry association. “In view of the significant drop in incoming orders, it is likely to deteriorate further in 2024 compared to the previous year.”

The association mainly represents larger companies. The construction industry expects 250,000 apartments to be completed last year and a further decline in the new year.

According to managing director Felix Pakleppa, the Central Association of the Construction Industry - representing the interests of medium-sized construction companies - expects a drop in sales of minus 13 percent in the main construction industry and 235,000 new apartments in 2024.

In a report for the federal government published in December, DIW Berlin was less pessimistic, predicting only a comparatively small decline from 270,000 new apartments in 2023 to 265,000 this year.

However, hardly anyone expects that housing construction will recover on its own in the next few years. “Without a fundamental change in housing construction policy with better funding and depreciation conditions for house builders and simpler construction specifications for the industry, even 200,000 apartments will no longer be feasible in 2025,” says construction industry general manager Pakleppa.

Increase in construction costs and interest

What are the causes? Since 2020, both the actual construction costs and the loan interest rates have increased significantly. In addition, there has been the back and forth over the past few years regarding the federal funding programs and the current budget cuts by the traffic light coalition. Construction companies and experts also repeatedly mention excessive bureaucracy and the constant tightening of building regulations.

Many people are desperately looking for apartments, especially in cities. Real estate prices fell last year, but rents continued to rise in many places.

“The current budget squabbles do not make the general conditions more favorable,” says Ifo construction expert Dorffmeister. “New residential construction in particular has hardly benefited from public money recently anyway.”

Three months after the housing construction summit in the Chancellery, all measures planned as an economic stimulus have been stopped or put on hold, construction industry managing director Müller criticizes the federal government. "There is also a lack of a clear perspective for the coming years, which is why the uncertainty on the market is immense."

There is a risk of capacity reductions and job cuts

According to an Ifo survey, the seasonally adjusted capacity utilization of building construction companies in December was only around 66 percent, the lowest value since spring 2010. "Seasonal adjustment for individual winter months certainly does not always work perfectly. However, the December value fits in well the downward trend observed in 2023," says Dorffmeister.

A looming specter on the horizon is workforce reductions in the construction industry. “It is already a bitter reality that every second residential construction company is suffering from a lack of orders,” says Müller. “Given this development, we will see a decline in employment in our industry in 2024 for the first time since 2008.”

There have been warnings about this in the construction industry for some time now: once companies have cut employees, it would be difficult to restart housing construction simply because of shrinking capacities. "Now it's important to prevent a massive crash, which would be dramatic for the housing construction industry, but also for social cohesion," demands Müller, managing director of the construction industry.