Dynamic & drivers of the crisis
Understanding the depth of the crisis requires a closer look at its key underlying drivers, such as insufficient demand & financial constraints, as highlighted in the Eurostat construction sentiment survey [6].
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Sudden ECB interest rate hike from 0% to 4%
1. Restricted loan accessibility
- There is a strongly reduced ability to finance new build construction due to the sudden ECB interest rate hike from 0% to 4% affecting mortgage rates.
- Furthermore, rejection rates of mortgage applications by banks have continuously increased since Q1 ‘22 as indicated by the ECB bank lending survey [7].
Construction costs increase vs Q4 ’19
2. Increased construction costs
- There has been a significant increase of construction costs in the last years, which are now ~27% higher vs. pre-COVID levels (Q4 ’19) in Europe [8].
- On top of this, volatility of prices has also increased dramatically, posing very practical challenges of quoting prices for construction projects that usually span across several months.
- While also rental income has increased over the years (e.g. 4-5% p.a. in Germany [9]), it did not compensate for higher construction & financing costs and hence the business case attractiveness has deteriorated for many investors.
- As a result, several large developers, e.g. Germany-based Vonovia & LEG have halted all new construction indefinitely.
Realization periods increase for housing projects vs 2015
3. Amplified regulatory burden
In Europe, stringent regulations notably prolong construction timelines, e.g.:
- In the Netherlands, meticulous zoning laws and detailed urban planning requirements add layers of bureaucratic hurdles, significantly prolonging the time from planning to project commencement.
- Meanwhile, in Germany, a study highlights extended realization periods for housing projects (+30% vs. 2015), particularly due to lengthier pre-permit phases and increasing need for documentation [10].
Social housing stock in Germany pre-reunification
Social housing stock in Germany in 2022
4 . Reduced direct government involvement/support
- Historically, governments played a more active role in housing, e.g., the Netherlands had a significant housebuilding program in the 70s & 80s, while Sweden's 'Miljonprogrammet' aimed to build one million dwellings in the 60’s.
- However, over time, this role has diminished, e.g., in Germany, where the existing social housing stock decreased from 4M units pre-reunification to just over 1M in 2022 [11], highlighting the need for renewed government participation.