Crash with announcement - now we are experiencing the end of the construction boom

Some economic crashes can be observed closely as they unfold. That was the case with the real estate bubble of 2007, when one bad loan after another swept to the surface, first pulling part of the industry and then finally a number of banks into the abyss. The crash could be followed almost live on TV.

The next burglary with announcement is currently taking place during construction. Surveys show that private project developers in particular are now expecting a real halt to construction. It's not just home builders who are letting their properties lie fallow, multi-family house projects are also being canceled in rows.

In the next two years, the project volume will drop to a level of 60 percent of what was built in 2020 and 2021, according to a survey by the Federal Association of Independent Real Estate and Housing Companies (BFW). "Sales and marketing activities have come to an almost complete standstill," states the association, in which around 1,600 companies from the private construction and real estate sectors are organized. "The housing industry is threatened with the worst crisis in decades."

The companies surveyed would only complete 80,000 residential units instead of 90,000 this year. By 2024, the number of new apartments will then shrink to 53,000. The total number of all apartments built in Germany this year is likely to be 280,000 units. This also includes detached and semi-detached houses as well as projects by municipal or cooperative companies.

But this number, too, is expected to shrink. The private projects, however, are considered a leading indicator. And there the sales figures in the second half of the year fell by 73 percent compared to the previous year.

Another leading indicator is the order intake in the construction industry. A year ago it was hardly possible to find a freelance craftsman. In September, calendar-adjusted incoming orders fell by almost 23 percent - the sharpest decline since February 2005. The years of capacity bottlenecks with fully booked construction workers and long waiting times - it should soon be over. Many orders are still being processed, but the construction boom will be over in just a few months. Within just three months, new orders have shrunk to almost a fifth, especially in residential construction.

The BFW therefore warns of a chain reaction. If masses of construction companies are soon left empty-handed, there is a risk of layoffs. "It's worse than expected," says BFW President Dirk Salewski and speaks of "insolvencies, unemployment and standstill in housing construction". The problem in the construction industry, which some may still remember from the disillusionment phase after reunification in the 1990s: construction companies are quickly given up, but then don't come back so quickly.

The reasons for the impending construction freeze are manifold. According to their own statements, the BFW member companies are responsible for 50 percent of housing construction. You often work in a market segment that uses a lot of investor capital. Since interest rates have risen, this capital is now looking for other avenues.

82 percent of construction developers name the high interest rates and inflation-related decline in demand as the main reason for canceled projects: financing is no longer possible, prospective buyers and investors are leaving because they are struggling with high prices elsewhere.

In second place, with 73 percent mentioning, are the significantly increased construction costs. A current observation from Hamburg shows what that means. There, the urban development authority last week put the average construction price for one square meter of a new apartment at 4,000 euros. A property price of around 1000 euros per square meter in the Hanseatic city would be added to that.

According to the authorities, anyone who wants to build a rental apartment under these conditions must charge 20 euros net cold rent for the whole construction to pay off at some point. Next year, the square meter construction price will even rise to 4500 euros. This should put an end to many projects. Even in Hamburg, the number of tenant households that can afford such prices is limited.

In third place, with 40 percent, private construction companies name poor funding conditions in Germany. The industry criticizes that after the Efficiency House 55 subsidy ended in January of this year, there was no successor plan.

At the Central Association of the German Construction Industry (ZDB), the forecasts are now bleak. ZDB President Reinhard Quast is a little more cautious than the BFW. According to Quast, sales will decline by 5.5 percent in real terms this year and by seven percent next year. "The framework conditions for the construction industry have deteriorated significantly."

The ZDB also surveyed its members. 74 percent of the companies in residential construction are therefore assuming a deterioration in business development. The targeted 280,000 apartments are likely to be completed this year. But then it goes down, with only 245,000 completions in the coming year and a further decline in 2024.

In the meantime, there is talk in the industry that in two years only 200,000 residential units may be completed. That would be half of the 400,000 units targeted by the federal government.

"If it is not possible to stabilize the framework conditions for construction investments, the number of employees in the main construction trade will fall for the first time since 2009," warns Quast of irreparable consequences on the labor market for specialists. After all, the increasingly popular refurbishment of existing buildings would counteract this. The federal government wants to promote energy conversions more.

In a dramatic appeal last Friday, 17 associations in the construction and real estate industry called for simplifications in construction and planning processes from federal and state governments. But also more money: From now on, a new building subsidy of ten billion euros a year is needed “for affordable housing”, according to the demand.