German housing sector finds itself in the throes of an unprecedented crisis as construction projects face record cancellations, sending shockwaves through the industry. A recent survey by the Munich-based Ifo Institute revealed that in September, a staggering 21.4% of residential builders reported the cancellation of their projects, marking the highest level since records began in 1991—surpassing the previous month’s already alarming figure of 20.7%.
*This article was written by Christophe Barraud and was republished with consent.
Business Climate for Residential Construction Hit Lowest Since Data Are Recorded
As conditions continue to deteriorate, the business climate for residential construction has plummeted to its lowest point since the inception of the survey over three decades ago. According to Ifo, nearly half of the companies surveyed lamented a dearth of orders, signaling a pervasive sense of uncertainty within the industry.
The root of this crisis can be traced to a confluence of factors. The European Central Bank’s successive interest rate hikes have resulted in soaring financing costs, putting immense pressure on companies within the housing construction sector. Additionally, construction prices have witnessed substantial spikes, partly attributed to material shortages and surging energy prices. These compounding challenges have left companies grappling with an unprecedented number of project cancellations, exacerbating an already precarious situation.
German House Prices Fell By Double Digits
Furthermore, the impact of this crisis on the wider housing market cannot be understated. The first half of 2023 has seen a sharp decline in German house prices, with higher borrowing costs, inflation, and tepid economic growth serving as primary catalysts for the drop. Experts are now characterizing the current landscape as a shift from a seller’s market to a buyer’s market, with potential investors growing increasingly hesitant and apprehensive.
According to data from Europace, existing German home prices registered an 11.2% year-on-year decline in September, a slight improvement from August’s 12.4% drop. Simultaneously, prices for newly constructed homes also experienced a 9.8% year-on-year decrease, a marginal improvement from the 10.0% drop observed in August.
In light of these challenges, the German housing sector faces an uphill battle in the months ahead. Navigating the headwinds of cancellations, escalating costs, and economic uncertainties will require concerted efforts and innovative solutions from both industry stakeholders and policymakers alike. The stakes are high, and the future of Germany’s housing market hangs in the balance.
About the Author:
Christophe Barraud is Chief Economist and Strategist at Market Securities. He has been awarded by Bloomberg the title of Top Forecaster of the U.S. Economy (from 2012 to 2020 and in 2022), Eurozone Economy (from 2015 to 2019 and in 2022) and Chinese Economy (from 2017 to 2020). He also won the latest Forecaster of the Year contest organized by MarketWatch in 2020. Since 2021, he has been Adjunct Lecturer at ESCP in the MSc Finance, which has been ranked first worldwide in the 2023 Financial Times Masters in Finance ranking.