Ifo survey cancellations in residential construction continue

The ifo index of business expectations in the residential construction sector has fallen to its lowest level since the survey began. In the eurozone, on the other hand, the trend toward more housing could stabilize the housing market despite rising interest rates.

German residential construction companies are struggling with a continuing wave of cancellations. According to a survey published today by the Munich-based Ifo Institute, last month more than one in ten companies (11.6 percent) reported that builders had withdrawn orders. There had already been a similar picture in July. The reason, according to ifo, is the sharp rise in construction costs with high material and energy prices, higher interest rates and reduced government subsidies.

Accordingly, pessimism has spread in the housing sector, many companies fear worse business. "Companies still have bulging order books, but looking at future developments, fear is taking hold," said ifo housing construction expert Felix Leiss. The ifo index of business expectations in residential construction fell to minus 48.3 percent. According to the institute, this is the lowest level since the monthly surveys began in 1991.

bottlenecks and price increases

The German Construction Industry Federation (HDB) was also still assuming at the end of August that sales in the industry would range between stagnation and a decline of two percent in the current year. According to the HDB, the price increases had been given a further boost by the war in Ukraine. An end to the bottlenecks and price increases is not yet foreseeable at present.

"For construction companies, the problem with unexpectedly sharp price increases is that these cannot be passed on to clients in the case of long-running projects, or only in exceptional cases – unless a price escalator has been agreed," the report continued.

Supply bottlenecks have eased somewhat compared to July, but more than a third (36.4 percent) of the companies surveyed still complained about material shortages. According to ifo, very many construction companies are planning further price increases.

Construction companies continue to enjoy good capacity utilization

The ifo Institute asks residential construction companies how the industry will fare in the next six months. And since, as Felix Leiss told tagesschau.de, a very large number of companies were expecting cooling. The Ifo Institute has been asking the question about cancellations every month for several years now: On average, these were just under two percent. According to Leiss, an increase to eleven percent is enormous.

Many cancellations were already seen during the Corona phase. However, the focus was on so-called commercial building construction. Currently, the situation is the other way round: more cancellations are being seen in residential construction. The reason for this is also the expiry and reduction of subsidies.

One is coming out of a situation in which things were going very well for very many years, according to Leiss. And there are still plenty of orders, it said, with construction companies continuing to enjoy good workloads. So they are not in a bad way, but there are clear signs of a slowdown.

Trend toward more housing could stabilize housing market in Europe

In the eurozone, the trend toward more housing could stabilize the housing market, according to the European Central Bank (ECB) – despite rising mortgage rates. The preference for more spacious housing units should also support investment in the housing market, write the authors of an article pre-published from the ECB's Economic Report, Niccolò Battistini, Johannes Gareis and Moreno Roma. "Changes in housing preferences triggered by the pandemic could counteract the higher mortgage rates and explain some of the resilience of the housing market observed in the euro area."

The authors point out that mortgage rates rose 0.63 percentage points in the first half of the year in the wake of the interest rate turnaround, the fastest increase in such a period since the introduction of the euro. They present a model according to which, if mortgage rates were to rise by a full percentage point, house prices could fall by nine percent within two years.

But with these projections pointing to impending sharp downward revisions in the housing market, it's important to keep in mind that other influencing factors must also be taken into account – such as changes in buyer behavior as a result of the pandemic: "Such factors could increase uncertainty with respect to the housing market outlook," the trade article states.

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