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German construction industry booming despite decline in energy-efficient refurbishment

Press Release of December 2, 2015

DIW Berlin’s construction volume calculations: construction industry remains a key pillar of the German economy—need for action in energy-efficient refurbishment and in accommodating refugees

The construction industry remains a key pillar of the German economy: buildings worth a total of around 338 billion euros will have been constructed or modernized in Germany by the end of this year—2.7 percent more than last year. An even greater increase of 3.9 percent to almost 352 billion euros is expected for next year. These figures are taken from the latest construction volume calculations by the German Institute for Economic Research (DIW Berlin). Residential construction in particular is booming: it is predicted to grow by 2.7 percent in 2015 and 2.2 percent in 2016 in real terms. “Interest rates and labor market conditions are both extremely favorable, and demand for housing is high, particularly in urban conurbations,” says one of the authors of the study, Claus Michelsen, Research Associate in the Department of Forecasting and Economic Policy and the Department of Climate Policy at DIW Berlin.

German Institute for Economic Research (DIW Berlin)

The German Institute for Economic Research (DIW Berlin) is one of the leading economic research institutions in Germany. Its core mandates are applied economic research and economic policy advice as well as provision of research infrastructure. As an independent non-profit institution, DIW Berlin is committed to serving the common good. The institute was founded in 1925 as Institut für Konjunkturforschung (Institute for economic cycle research). Since 1982, the Research Infrastructure SOEP (German Socio-Economic Panel Study), a long-term study, is affiliated to DIW Berlin. The institute has been headquartered in Berlin since its founding. As a member of the Leibniz Society, DIW Berlin is predominantly publicly funded.

Conversely, refurbishment measures on existing residential buildings lack momentum. “Homeowners in particular are holding back with comprehensive modernization measures,” says Christian Kaiser of Heinze GmbH, another co-author of the study. Energy-efficient refurbishment is especially weak: its volume has been declining for years and fell by a total of 15 percent from 2010 to 2014. Reasons for this are likely to be reduced subsidies for photovoltaic systems as well as the low oil price, which makes investment in energy efficiency unattractive compared with previous years. “Investment in this area would need to increase considerably in order to meet the ambitious targets for saving on heating energy,” says Martin Gornig, Deputy Head of the Department Firms and Markets at DIW Berlin. “At the moment, things are moving in the wrong direction— policy-makers should be aware of this, also in view of the UN Climate Change Conference in Paris.”

Construction of new buildings not sufficient to accommodate asylum-seekers

Another challenge in residential construction is the rapidly rising number of asylum-seekers in Germany. Many will stay in the country long-term and consequently need accommodation. Even the strong new residential construction activity in Germany—245,000 new apartments were constructed last year—is not expected to be sufficient, however. A major stumbling block here is the availability of building land: despite the strong growth in new construction, the amount of building land sold recently is no higher than in previous years. Most asylum-seekers will probably search for apartments in the lower quality segment as soon as their refugee status has been granted. Investment should be channeled primarily into this area so as to avoid even greater competition and shortages here—precisely in urban conurbations.

Commercial construction and public construction likely to experience strong growth in 2016

Alongside new residential construction which is performing well—the volume of apartment buildings constructed between 2010 und 2014 more than doubled and the volume of owner-occupied properties constructed also increased by 39 percent—commercial construction is somewhat sluggish. After a strong start to the year because of mild weather conditions, companies invested much less in the expansion and maintenance of their production plants for the rest of the year as was already the case in 2014. Growth is expected to remain tentative next year—this is partly because at present the economy in Germany is primarily consumer driven rather than sustained by industrial production. Nevertheless, after a drop of 1.7 percent this year, the volume of commercial construction is predicted to increase by one percent in 2016.

After a weak year in 2015—a decline in volume of 0.9 percent is expected compared to the previous year—growth of public construction is predicted to increase by 2.8 percent next year. Additional resources from the municipal investment promotion fund, inter alia, are likely to have a positive effect. What remains to be seen, however, is what impact the increasing number of asylum-seekers will have. While it is expected to deter the less affluent municipalities in particular from investing in construction on public buildings or infrastructures such as bridges, roads, community centers, or swimming pools, the additional funds provided to fit out premises to accommodate refugees are likely to act as a positive stimulus for construction activity.

Energy-efficient refurbishment: quality over quantity

After a long period of stagnation at the beginning of the millennium, the overall conditions for the German construction industry could hardly be more favorable at present. Demand for housing is high, interest rates are low, and alternative forms of investment are not very lucrative. Growth of investment in energy efficiency measures is comparatively weak, however. Although policy-makers are providing considerable subsidies, real estate owners are not making sufficient use of these. Particularly proprietors of single-family homes and duplexes who occupy their own properties are holding back and—if at all—they are only tending to carry out individual small-scale construction projects on their homes instead of comprehensive modernization.

“In light of this, the German government’s interim objective to reduce primary energy demand in the buildings sector by 20 percent by 2020 is increasingly being called into question,” say DIW Berlin’s construction industry experts Martin Gornig and Claus Michelsen. They point out that one problem here is that funding instruments used to date in the form of subsidies or low-interest loans cannot increase the refurbishment rate in the long term but only lead to pull-forward effects. Consequently, the authors of the study advocate focusing in future more on the quality of refurbishment: promoting higher efficiency standards more vigorously, through tax advantages, for instance, might have a more sustainable impact on the refurbishment rate.