Residential construction in Germany - Deutsche Bank Research

10% of GDP
Construction investment as % of GDP
(nominal)
1970 1980 1990 2000
18
16
14
12
10
8
6
4
2
0
2010
Residential construction
Non-residential construction
Source: Destatis 1
Correlation between
construction and GDP
Nominal growth, % yoy
1970 1980 1990 2000
35
30
25
20
15
10
5
0
-5
-10
-15
2010
GDP
Residential construction
Non-residential construction
Source: Destatis 2
Moderate pick-up in building
permits
Number of approved housing units ('000)
450
400
350
300
250
200
150
100
50
0
1992 1995 1998 2001 2004 2007 2010
Single and two-family dwellings
Multi-family dwellings
Source: Destatis 3
Introduction
Current Issues
In 2010, nominal investment in construction totalled nearly
EUR 250 bn in Germany. Residential construction alone accounted
for over EUR 140 bn of this total, with the rest divided between nonresidential
commercial construction and civil engineering projects.
Construction investment thus generates around 10% of Germany‘s
gross domestic product (GDP); this roughly equals the mean for
Western Europe. Significantly higher readings are often a reflection
of catching-up processes, as is currently the case in Eastern
Europe, or of overheating, as in Spain and Ireland before 2007.
The absolute volume of residential construction alone does not
determine its overall economic significance, though. The political
and social value attached to housing as a good as well as the
pronounced volatility of the sector also play a part: in recession
years residential construction experiences a particularly strong
slump, whereas in boom phases the sector outstrips the economy
as a whole. This is why the standard deviation for the growth rate of
residential construction has been over twice as high as for GDP over
the past 40 years. These characteristics also make residential
construction a popular target for economic and (re-)distribution
policies. In Germany, very expansionary residential-construction
policy measures triggered sizeable growth stimuli in the early 1990s,
but as special depreciation charges, accelerated depreciation
schedules and the home-ownership grant were gradually abolished
or at least curtailed over the subsequent years, the result was a
lasting recession in residential building and weak house prices. The
development of residential building permits and completions gives a
very good illustration of this adjustment burden: in the multi-family
segment the number of housing units approved fell by over 80%
within ten years, while for single and two-family dwellings the
decline came to 60%.
Over the past few years many housing markets have stabilised. A
resumption of income growth and still comparatively low mortgage
rates are currently driving up the price of rental accommodation and
house prices. 1 In 2010, rents and prices increased by 2-3% in
Germany‘s major cities. While this represents an only modest climb
by international standards, for Germany it translates into the biggest
jump since 1994.
This development raises several key questions: how close is the
correlation between house prices and building activity? Does a
recovery in the housing markets also trigger a significant resumption
of building activity? Which regions are likely to see the most
pronounced recovery?
There are tentative signs of reviving activity in the residential
construction sector – building permits are up by around 10% since
the 2008 low. And, in the first 5 months of 2011 the number of
residential building permits actually jumped by over 30% yoy. Does
this provide clear evidence of a trend reversal?
1 See Just, T. (2010).
2 August 22, 2011