Projections indicate a significant decline in new housing construction in Germany by 2026, driven primarily by high building costs, with annual completions expected to fall to 175,000 units.
Construction is decreasing in Germany: the number of newly built homes could drop to just 175,000 in 2026, according to a recent forecast from the ifo Institute. This would be over 40 percent less than the nearly 300,000 homes built in 2022. “The forecast is fraught with uncertainties, but it is pretty clear that we will fall below the 200,000 mark by 2026 at the latest,” says ifo construction expert Ludwig Dorffmeister to the dpa.
This means the new-build market is moving further away from the target set by the coalition government: upon taking office in 2021, the government aimed to build 400,000 new homes per year – a goal that is now increasingly out of reach.
Not only Germany is affected by the decline: in 15 Western European countries, the number of new home builds is expected to drop from over 1.5 million annually to 1.2 million, according to a recent forecast from the research network Euroconstruct.
Building permits as an indicator
A key factor in the ifo Institute’s forecast for the German housing market is the slump in building applications and housing construction permits. According to the Federal Statistical Office, only 17,800 building applications were approved in May, nearly 44 percent less than in May 2022.
Construction costs have become so high that many housing cooperatives and municipal companies have put new projects on hold. The main reason: for buildings to amortize within the usual 25 to 30 years, companies would have to charge rents far above the local average, even outside metropolitan areas, which people in smaller cities would likely be unable to afford.
“Little hope for a trend reversal”
A fundamental improvement is not in sight: “Overall, I have little hope for a major trend reversal,” says Dorffmeister. “Like in other European countries, new housing construction is currently feeling the negative effects of high inflation and the jump in interest rates,” the ifo researcher continues. “In Germany, however, construction costs have completely spiraled out of control and are preventing market recovery.”
In the coming years, building is expected to become even more expensive, according to Dorffmeister’s assessment: “The Federal Statistical Office’s construction cost index shows that the previously sharply increased material costs are not falling but are rather stabilizing, while labor costs are catching up in large steps.” The collective bargaining agreement for the construction industry will lead to further cost increases in the coming years.
High demand for new builds
The need for new housing is significant, as shown by the employer-affiliated economic research institute IW Cologne. The institute estimates the annual demand for new builds to be 372,000 homes by 2025, and 302,000 per year for the following years up to 2030. Tenants who need or want to move in urban areas in the coming years should be prepared for a challenging search and high costs.
