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Construction industry momentum continues – state stimulus impacts prices

Weekly Report of January 14, 2019

By Martin Gornig, Claus Michelsen, and Martin Bruns

According to the German Institute for Economic Research construction volume forecast, the country’s construction industry will continue to flourish in the coming years. Companies can count on a rise in the nominal construction volume of around 7.5 percent in 2019 and 6.5 percent next year. The industry’s business cycle continues to be supported by the flourishing residential construction sector, which has received additional stimulus from policy makers. The child benefit for building and increased tax deduction rates for rental unit construction will make prices catapult. But due to the short-term nature of the funding programs, the construction industry will minimally expand its capacity and instead leverage its flexibility in setting prices. The nominal rise in the volume of new construction of over ten percent will be offset by a significantly lower growth rate adjusted for inflation. In view of the nation’s tight innercity housing market and the current high level of real new housing construction, policy makers would do well to establish incentives for urban development – building on vacant lots, in particular – and supporting the construction of additional residential space in urban development zones instead of taking a shotgun approach to funding. Above all, a funding approach for social housing targeted to specific geographical areas would be useful.