The collapse of German homebuilding threatens to cause wider economic damage

Wolfgang Schubert Raab remembers the boom years when his company could not build enough homes.

Raab Construction’s managing director said that in 2021 before the company had even poured a single cubic metre of cement, they’d received offers for more than half of the building. Schubert-Raab says that the single-family housing market is “completely collapsing” two years later.

Homebuilders in Germany are experiencing such a dramatic reversal of fortunes, that it is threatening to spread across Europe’s biggest economy.

Many people have declared themselves unsolvent. This has dampened Chancellor Olaf Scholz’s target to build 400,000 new houses a year in order to combat the housing affordability crisis that is affecting several of the largest cities in Germany.

The federal government and state legislatures have teamed up to unveil a package of initiatives aimed at accelerating housebuilding through the reduction of red tape. The industry representatives see the response as an important step forward, but they are worried that the measures are too weak and the implementation will be slow.

Tim-Oliver Muller is the managing director of HDB, German Construction Federation. He said, “Based on our past experiences, we do not believe it will be implemented soon.” Federal structures are too complex to do that.

Gereon Frauenrath is the managing director of German construction company Frauenrath Group. He describes a “perfect hurricane” that has hit German builders after a decade long boom fuelled with strong demand, cheap credits and low raw material costs.

The price of raw materials has risen by more than 40% since the pandemic, the largest increase in Europe. Credit-intensive sectors must also deal with 10 consecutive interest rate increases by the European Central Bank. The country is still short of homes that are suitable, particularly in major cities. However, the cost of borrowing has put many potential buyers off.

This has resulted in a massive loss of confidence, which has made the residential property market one of the worst performing markets in Europe.

In the second quarter of this year, house prices fell by 10% compared to the same period last year. The number of building permits has also fallen much faster than the rest the region. In October, 22,2 per cent of firms reported cancelled projects – the highest number since 1991 when the Ifo think tank began to record the figures.

Klaus Wohlrabe is the head of Ifo’s surveys. In residential construction, the number of new orders is very low. The order backlogs for companies are also decreasing.

The construction output increased by 16 percent between the first quarter 2015 and the beginning of 2022. According to Eurostat, the EU’s statistical office, demand surged due to low interest rates and lax lending criteria, which led house prices up by 66 percent.

The IMF’s ranking of the world’s leading economies has been impacted by the problems of this sector, which will account for more than 5% of GDP in 2021.

Susannah Streeter is senior investment analyst for asset manager Hargreaves-Lansdown. She said that “given the fact that Germany’s real estate sector drives growth, [the issues] do not bode well.”

The pressure is also felt by firms whose fortunes depend on residential construction.

Sabine Brockschnieder is the managing director of Baumann Group. The company has been building Germans’ kitchens and bathrooms for over a century. She says that times have never been more difficult.

Brockschnieder added that smaller companies would face severe difficulties due to the decline in sales and rising costs. Orders have dropped 15 percent from a year earlier.

Baumann will be forced to reduce some of its 1,200 employees and place others on furlough due to rising costs and weaker demand.

Brockschnieder said, “Unfortunately, it is likely that we will have to let go of the temporary workers, as we anticipate next year’s situation to be worse.”

Many housebuilders believe that the government should step in to correct what they see as a market failing.

Many argue that despite the recent economic downturn, there is still a lack of affordable housing in large cities like Berlin, Munich and Hamburg.

The current situation — higher construction costs, and an increase in interest rates — is scaring away investors and builders, said Jorg Hegestweiler. BKL Baukran Logistik sells and leases cranes for the construction industry.

In September, industry and the federal government agreed on a 14-point plan of action that included tax incentives, attractive subvention programmes, lowering energy-saving standards, and simplifying planning and approval procedures.

The Building Minister Klara Geywitz stated that the measures announced on Monday will speed up the revival of the construction sector by reducing bureaucratic and regulatory hurdles.

She said that in order to build affordable housing more quickly, she needed more speed with planning, approval, and construction. The pact reached by the federal government and the state governments will bring about the needed acceleration.

Felix Pakleppa is the managing director of ZDB. This association represents 35,000 construction firms. He says that although this package offers “a glimmer hope”, more needs to be done.

To be able switch to acceleration mode you need new orders. “And these are getting fewer and less,” said Pakleppa. He called on the government to approve a greater number of measures that were agreed upon in September.

Schubert-Raab said that firms lack confidence.

He says, “Our industry does not work like a greyhound racetrack — it can take up to two years to get a property from the planning phase to its occupancy.” “People who want to build require security. “Nobody will invest without it.”