Germany's wave of cancellations in residential construction continues at alarming rates, with expectations reaching an exceptional low of -63.9 points, according to a recent survey by the ifo Institute (Leibniz Institute for Economic Research at the University of Munich).
22.2% of companies reported cancelled projects in October 2023, up from 21.4% in the previous month;
48.7% of companies reported a lack of orders, up from 46.6% in September. In comparison, in October 2022, the proportion was 18.7%.
It's getting worse all the time, with more and more projects failing due to higher interest rates and elevated construction prices. In residential construction, new business remains very low and companies' order backlogs are diminishing.
Klaus Wohlrabe, Head of Surveys at ifo
Almost 50% of residential construction companies are currently experiencing a shortage of orders, and this percentage is increasing each month. This situation is jeopardizing the survival of multiple companies, with 10% of them already facing financial challenges. According to Wohlrabe, the future looks grim for the residential construction industry as companies prepare for difficult times ahead.
Possible Factors Leading to Cancellations in Residential Construction
Fluctuating Market Conditions: The residential construction sector is highly susceptible to changes in the economic landscape. When the market experiences periods of instability, such as fluctuations in interest or employment rates, prospective buyers may hesitate to proceed with their plans to purchase or build homes. Uncertainty regarding the overall economic outlook often leads to cancellations.
Affordability Concerns: The cost of housing plays a crucial role in decision-making processes. Rising land prices, construction costs, and materials expenses can result in higher property prices, making it challenging for potential buyers to afford their desired homes. Consequently, some individuals cancel their projects or postpone their plans until the market becomes more favourable.
Limited Financing Options: Access to financing is a significant factor influencing the residential construction sector. Stringent lending criteria or difficulty obtaining loans can dissuade individuals from pursuing their housing projects. This lack of financing can be particularly problematic for small-scale developers, leading to cancellations.
Regulatory Challenges: Compliance with building codes, zoning regulations, and environmental requirements adds a layer of complexity to the construction process. Delays or increased costs resulting from regulatory hurdles can discourage developers and buyers, leading to cancellations.
Labour and Material Shortages: The availability of skilled labour and construction materials can heavily impact project timelines and costs. When the industry faces shortages in these areas, delays and increased expenses occur. In turn, this can lead to cancellations as individuals may be unable to bear the burden of extended project durations or higher costs.
Changing Preferences and Needs: Consumer preferences and needs evolve. If a project fails to align with current trends or does not meet the changing needs of potential buyers, there is a higher likelihood of cancellations. Market demand plays a crucial role, and failure to meet these demands can result in project abandonment.
Despite the cancellations, we can remain optimistic about the long-term outlook for Germany's residential construction sector. The demand for housing is still high, and the government continues to support infrastructure and housing initiatives. As the economy stabilizes, we expect the sector to regain its momentum.
Mihaela Lica Butler is senior partner at Pamil Visions PR. She is a widely cited authority on public relations issues, with an experience of over 25 years in online PR, marketing, and SEO.She covers startups, online marketing, social media, SEO, and other topics of interest for Realty Biz News.