Ifo survey: cancellations in residential construction continue

The ifo index of business expectations in the housing sector has fallen to its lowest level since the survey began. In the euro zone, however, the trend toward more housing could stabilize the housing market despite rising interest rates.

German housing companies are struggling with a continuing wave of cancellations. According to a survey published today by the munich-based ifo institute, more than one in ten companies (11.6 percent) reported that builders had withdrawn orders last month. Already in july there had been a similar picture. 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 throughout the homebuilding industry, with many companies fearing worse business. "Companies still have bulging order books, but looking ahead, fear is taking hold," said ifo housing 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

At the end of august, the main association of the german construction industry (hdb) was still assuming that the sector's sales in the current year would range between stagnation and a decline of two percent. According to HDB, price increases would have received a further boost from the war in ukraine. An end to the bottlenecks and price increases is not yet foreseeable at present.

"For construction companies, the problem of unexpectedly strong price increases lies in the fact that, in the case of long-term projects, these cannot be passed on to the client, or can only be passed on in exceptional cases – unless a price escalator has been agreed," it continued.

Supply bottlenecks have eased somewhat compared to july, but more than one-third (36.4 percent) of the companies surveyed still complained about material shortages. Very many construction companies plan further price increases, according to ifo.

Construction companies continue to enjoy good capacity utilization

The ifo institute asks housing construction companies how the sector will fare in the next six months. And since, as felix leiss told tagesschau.De, a great many companies were expecting a slowdown. The ifo institute has been asking about cancellations every month for several years now: on average, they were just under two percent. According to leiss, the 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 it is the other way around: so one sees more cancellations in residential construction. This is also due to the expiry and reduction of subsidies.

You're coming out of a situation where things were going very well for very many years, leiss said. And there are still plenty of orders, he said, and the construction companies are still well utilized. 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 higher mortgage rates and explain some of the resilience in the housing market observed in the eurozone."

The authors point out that mortgage rates rose by 0.63 percentage points in the first half of the year in the wake of the interest rate turnaround, the fastest rate 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 imminent sharp downward revisions in the housing market, it is important to bear 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 regard to the housing market outlook," the article says.

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