Construction industry – DIW issues growth forecast and a recommendation

The entire construction industry (civil engineering, commercial construction, and residential construction) can expect nominal construction volume growth of around 7.5 percent in 2019. In 2020, it will likely be 6.5 percent. This is the forecast by the German Institute for Economic Research (DIW) in Berlin as part of its construction volume forecast. According to the DIW, the driver of growth is the booming construction of residential real estate, which politicians are promoting with additional incentives. Instead of providing broad-brush subsidies, politicians should concentrate funds on social housing in inner cities, the institute advises.

Measures such as family housing grants drive up construction prices

According to DIW forecasts, construction prices will rise by about 4.5 percent in 2019 and are expected to increase by an additional 3.5 percent in 2020. The DIW attributes these increases to high capacity utilization, strong demand in residential real estate construction, and state activity in the infrastructure sector. This means, not least, that nominal growth in the construction industry is primarily driven by above-average price increases.

According to the DIW, this was the case in 2018 with a nominal growth of ten percent in new construction. It will be similar in 2019 and 2020. According to forecasts, the construction volume will rise to around 430 billion euros in 2019 and to just under 460 billion euros in 2020. Since a large part of the money goes into price increases, the forecasted growth rates are significantly weaker. According to the DIW, growth will be 2.9 percent in 2019, while it could reach around 3.1 percent in 2020.

Current government subsidies are driving up prices

The funding measures currently initiated, which are set to expire in three years, are doing little to encourage construction companies to build additional capacities. In the current situation of a „construction industry at capacity limits,“ companies will instead exploit their pricing leeway, the DIW suspects. Therefore, the DIW expects that measures such as higher depreciation allowances for rental housing (special depreciation/Sonder-AfA) and the family housing grant (Baukindergeld) for more private residential real estate will further drive up prices in the construction sector.

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Funding measures should set different priorities

The DIW advises changing subsidies to channel funds specifically into those areas currently experiencing displacement processes. This refers in particular to high-demand regions in larger cities. Here, with a real decline in growth momentum in new housing construction and a spatially unfocused new construction activity, no quick solution to the housing problem is to be expected. As a viable approach to a solution, the DIW sees increased social housing construction, for which the federal government has greater leeway thanks to recent constitutional amendments. However, according to the DIW, construction measures for new real estate should avoid the mistakes of the past, such as incorrect occupancy, a lack of cost-efficiency, and windfall effects. „It's not the mass that counts, but the right spatial layout,“ writes the institute, demanding that municipalities themselves should be responsible for defining suitable areas in which to invest in real estate construction.

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