2022 is the year of high construction costs. First the pandemic, then the Russia-Ukraine war. Supply chains in the industry are disrupted. This naturally has an impact on the order situation on the construction market. According to the Federal Statistical Office, the figures for demand for residential construction are falling sharply. Is residential construction facing a complete slump?
Thomas Wienroth, housing market expert and estate agent from Jena, provides deeper insights.
Mr Wienroth, how have construction prices changed recently?
In our last article, we reported on the effects of inflation on the property market. Construction prices are also exploding at the moment. There was a report from the Federal Statistical Office in May of this year. This showed that the number of new orders received by all construction companies with 20 or more employees fell by 13.5% compared to the previous year. Not only construction costs have risen. The costs of energy, interest and living expenses have also risen. Everyone is feeling this in their everyday lives at the moment and unfortunately this trend is not stopping with construction costs.
That's bad, because the orders are there. A spokesman for the Bavarian Building Guilds Association in Munich, for example, says that there is a huge wave of orders, but there is a lack of raw materials. This means that there are massive price increases every eight weeks. It starts with aluminium and ends with wood. The construction and housing industry reports further bottlenecks in steel, steel alloys and higher prices for ceramic goods and tiles.
Is residential construction really collapsing in your eyes?
When we look at residential construction, we have to look at the entire construction industry. And things do not look rosy there. Here, the order rate fell by 3.5% compared to the previous year. The reason for this is - as everywhere - bottlenecks in the supply chains. It is obvious: where there is no material, there is no construction. Pessimists assume that residential construction will collapse in 2023. We are initially aware of the sharp decline without panicking.
However, it is clear that investors have been very cautious since the war between Russia and Ukraine. Due to the ongoing uncertainties and the sharp rise in prices in the construction industry, the residential construction market is proving to be quite critical. Some housing co-operative associations in Germany report that the "prospects for new construction starts" look poor to very poor. Many projects are being postponed.
What do the current price changes for flats look like?
The ImmoScout 24 Residential Barometer shows a sharp rise in asking prices for rental flats. In the 2nd quarter of this year, existing flats were on average 2.7% more expensive for new lettings (compared to the previous quarter). New-build flats recorded a price increase of 3.6% (1.8% higher than in the previous quarter). Added to this is the 3% increase in interest rates.
Are there any rays of hope for housing construction?
Kleine. The federal government is not leaving the construction industry in the lurch. Provided they are public-sector clients, construction companies have the option of passing on some of the increased prices for cement or steel, for example, to the state. A regulation for special "price escalation clauses" applies until the end of 2022.
The good news is that this was due to end in the middle of the year, but has been extended until 31 December 2022. This means that the federal government will participate in new contracts and, under certain circumstances, also in existing contracts. The cut-off date is 11 March 2022 and the agreement for price escalation clauses is currently 0.5% material share. The deductible will be reduced to 10%, at least for existing contracts. That is half, as it was previously 20%. The Ministry of Construction reports that this clause will also apply to new contracts.
However, China's special coronavirus policy and the unforeseeable consequences of the Russia-Ukraine war will not have a favourable effect on residential construction.