Germany’s housing slump threatens wider economic damage

Wolfgang Schubert-Ropp recalls that the boom was so good that his company couldn’t build houses fast enough.

„By 2021, even before we pour the first cubic meter of concrete, we will already have offers on more than half of the premises,” said the managing director of Rab Construction. Two years later, the market for single-family homes is in what Schubert-Robb describes as a „complete collapse.”

Across Germany, housebuilders are facing a sharp reversal in their fortunes, with a slump in residential construction threatening to have wider repercussions across Europe’s biggest economy.

Many of the country’s biggest cities have declared bankruptcy, undermining Chancellor Olaf Scholes’ target to build 400,000 new homes a year to tackle the housing crisis.

This week, the federal government, along with state legislatures, unveiled a package of measures aimed at cutting red tape and speeding up housing. Industry representatives see the response as a step in the right direction, but the measures are insufficient and the rollout is too slow.

Tim-Oliver Müller, managing director of the German Construction Federation (HDB), said: “Based on past experience, we do not believe that this will be implemented quickly. Federal structures are too complex for that.

After a decade of boom fueled by strong demand, cheap credit and low costs for raw materials, German builders are now facing what Gereon Frauenrath, managing director of construction firm Frauenrath Group, describes as a „perfect storm”.

The cost of raw materials is now more than 40 percent higher than before the pandemic — the biggest surge in Europe. The debt-intensive sector will also have to contend with 10 direct interest rate hikes by the European Central Bank. There is still a shortage of suitable housing in the country, especially in major cities, and the high cost of borrowing is pushing many prospective buyers away.

The result has been a devastating loss of confidence, resulting in the country’s residential property market being one of the worst performing in Europe.

House prices fell 10 percent year-over-year in the second quarter, while the number of building permits issued sank faster here than in the region as a whole. In October, 22.2 percent of companies reported canceled plans — the most since the Ifo think-tank began recording the figure in 1991.

„It’s getting worse all the time,” says Klaus Wohlrab, Ifo’s head of research. „In residential construction, new business is very low and firms’ order backlog is shrinking.”

Construction output rose more than 16 percent between the first quarter of 2015 and the beginning of 2022. House prices rose 66 percent, the European Union’s statistics office said, as demand surged on the back of low rates and relatively relaxed credit standards. Eurostat.

The sector’s woes, now expected to account for more than 5 percent of GDP in 2021, contribute to an outlook that has seen Germany slide down the IMF’s ranking of leading economies.

Susannah Streeter, senior investment analyst at asset manager Hargreaves Lansdown, said: „The real estate sector is a driver of growth in Germany, [the sector’s issues] Don’t lead the way.”

Companies associated with residential construction are also experiencing difficulty.

Sabine Brockschnieder, managing director of the Baumann Group, which has built German bathrooms and kitchens for more than a century, says times have rarely been tougher.

„Smaller companies will face serious difficulties with falling sales and increased costs,” Brockschnieder said, adding that orders were down 15 percent from a year ago.

Rising costs and weak demand are expected to force Baumann to cut some of its 1,200 workers and plan to lay off others.

„Unfortunately, we’re forced to part ways with the temporary staff we’ve been hiring because we expect next year to be even worse,” Broxnider said.

The industry hopes the government should step in to fix what many housebuilders see as a market failure.

Unlike the declines of the 1990s or early 2000s, they argue, residents of large cities such as Berlin, Munich, Hamburg, Cologne and Frankfurt still face a shortage of affordable housing.

„The current conditions – high construction costs and rising interest rates – are scaring investors and builders,” said BKL Baukran Logistik chief executive Joerg Hejstweiler.

In September, the industry agreed to a 14-point action plan with the central government that included a combination of tax incentives, attractive subsidy schemes, lowering energy efficiency standards and simplifying planning and approval procedures.

The package of measures announced on Monday will speed up the revival of the sector by reducing bureaucratic and legal barriers for builders, said Buildings Minister Clara Keiwitz.

„We need more speed in planning, approval and construction so that affordable housing can be built faster,” he said. „The agreement that the central and state governments have now agreed to will ensure the necessary acceleration.”

Felix Bagleppa, executive director of the ZDB, an association representing 35,000 construction firms, said the package of measures offered a „glimmer of hope” but more was needed.

“To switch to acceleration mode, you first need new orders. And these are decreasing,” said Bagleppa, calling for the government to ratify the measures agreed in September.

Schubert-Robb, president of ZDB, said the companies were still undecided.

“Our industry is not a greyhound track – it takes two to three years for a property to go from the planning stage to being ready for occupation,” he says. “People who want to build need protection. Without it, no one would invest.