Germany’s housebuilding sector is ‘in a confidence crisis’

Germany’s housebuilding sector is ‘in a confidence crisis’

A construction site with new apartments in newly built apartment buildings.

Patrick Pleul | Picture Alliance | Getty Images

The German housing sector has continued to deteriorate in recent months.

Economic data paints a worrying picture and industry leaders appear unsettled.

“I would say the housing sector is in a bit of a crisis of confidence,” Dominik von Acht, chief executive of German building materials company Heidelberg Materials, told CNBC’s “Squawk Box Europe” on Thursday.

“There are too many things that have gone in the wrong direction,” he said, adding that the company’s volumes in Germany have declined significantly.

According to the Ifo Institute for Economic Research, both the current mood and expectations for German housing construction fell to an all-time low in January. The business climate score fell to negative 59 points, while expectations fell to negative 68.9 points over the course of the month.

“The prospects for the coming months are bleak,” said Klaus Wohlrabe, head of surveys at Ifo, in a press release at the time.

Meanwhile, Hamburg Commercial Bank’s construction PMI survey in Germany also fell to its lowest ever in January at 36.3 – after December’s reading was also the lowest on record. PMI readings below 50 indicate a decline, and the lower the reading is to zero, the greater the decline.

“Among the broad construction categories monitored by the survey, housing activity continued to perform the worst, posting one of the fastest declines on record,” the PMI report said.

The problem is also affecting Germany’s overall economy.

German Economy and Climate Minister Robert Habeck said on Wednesday the government had cut its growth expectations for gross domestic product in 2024 to 0.2% from a previous estimate of 1.3%. Habeck referred to rising interest rates as a key challenge for the economy and explained that these had led to lower investments, particularly in the construction sector.

Light at the end of the tunnel?

Ifo data showed that the number of companies reporting order cancellations and lost orders fell slightly in January compared to December. Nevertheless, 52.5% of companies said that not enough orders were being placed, which Wohlrabe said was putting a strain on the industry.

“It is still too early to speak of a turnaround in housing construction, as hardly anything has changed in the difficult conditions,” he said. “High interest rates and construction costs don’t make things any easier for builders.”

However, Von Acht of Heidelberg Materials suggested at least some easing could be on the horizon and said there could be good news on the interest rate front.

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“I am confident that inflation in Germany is now really falling, perhaps thanks to the ECB.” [European Central Bank] “The reality is that interest rate cuts are coming sooner than we all think. Let’s wait and when that happens, of course the trust will come back,” he said.

Even if interest rate cuts are a slow process, confidence should return, says von Achten, as soon as “people see the turning point.”

In a speech to the German Bundestag on the economic outlook on Thursday, Habeck said the government expects inflation to fall further and return to the target level of 2% in 2025.

The European Central Bank said at its last meeting in January that discussion of interest rate cuts was “premature” despite progress being made on inflation. While the exact timing of the rate cuts remains unclear, markets are largely anticipating the first cut in June, according to LSEG data.

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2024-02-23 06:17:07