The issuance of building permits across Europe has declined, and construction costs remain high, indicating a tough year ahead for the construction industry. Conversely, the prices of existing homes are rising again, potentially boosting the demand for new builds.

Marginal Growth in Construction Output for 2023

In 2023, the EU saw a slight increase in production volumes by 0.1%, driven by a strong first quarter. However, there was a decline in the third and fourth quarters by 0.3% and 0.2%, respectively. High interest rates and a weak economy have deterred both home buyers and firms from investing in new buildings. In contrast, the renovation sector and civil engineering projects have remained relatively stable due to ongoing sustainability efforts and investments in digital infrastructure.

Decline throughout 2024

A slight decline in production volumes by 0.5% is expected throughout 2024. The reduction in new residential and non-residential building volumes is attributed to the past reluctance of buyers and firms to invest in new premises. However, there is structural growth in the renovation subsector, including sustainability works, and continued investments in infrastructure, driven by EU Recovery funds and the need for digital and energy infrastructure expansion.

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Optimism for 2025

For 2025, there is an expectation of continued growth in the renovation and infrastructure sectors. The new building sector is also projected to slowly recover as the housing market improves. This recovery is expected to be gradual due to the recent decline in building permits.

Stable Order Books for Contractors

European contractors’ order books have remained stable over the past two years, with EU construction firms holding an average of 9.1 months of work at the beginning of 2024. This stability contrasts with the significant declines seen during the 2008 financial crisis. The current downturn affects primarily new constructions, while renovation and sustainability projects provide a more stable workload.

Rising Housing Prices

House prices in many EU countries are on the rise again, supported by structural housing shortages in cities and increasing wages. For instance, Spanish house prices increased by over 4% in 2023, with further, albeit smaller, increases expected in 2024. Germany remains an exception, where house prices are still declining due to economic sluggishness.

Increasing Prices for New Houses

The increase in existing house prices is beneficial for new residential building volumes, as the two markets are closely linked. When prices for existing houses rise, project developers have the opportunity to raise the sales prices of newly built houses. This trend is observable in most EU countries, except Germany, where residential developers are reducing prices in response to falling prices of existing homes.

Impact of Higher Building Costs

Higher sales prices of residential properties allow contractors to pass on the increased costs of building materials, which have stabilized in 2023 but remain high. Despite these costs, the demand for new-build houses shows signs of improvement, although building permits have become a significant bottleneck.

Decline in Building Permits

The number of issued building permits has decreased over the last two years, with a 14% decline in residential building permits in the third quarter of 2023 compared to the previous year. This decline is expected to impact the new residential sector in 2024, with recovery anticipated in 2025 due to housing shortages in European cities.

Sector-Specific Developments

·        Austria and Germany: These countries have seen the sharpest declines in issued permits, driven by the end of housing subsidies, high interest rates, and economic sluggishness.

·        Spain: In contrast, Spain has experienced a significant increase in residential building permits, supported by rising house prices that offset higher building costs.

Growth in the Infrastructure Sector

The infrastructure sector has shown resilience, with moderate growth supported by EU funds and investments in energy transition and digital infrastructure. This sector benefits from government investments, particularly in power grids and digital infrastructure, despite the economic cycle’s impact.

Continued Investments in Infrastructure

Infrastructure investment remains strong, driven by EU funds and the need for digital and energy infrastructure. For example, Spain is leveraging Next Generation EU funds for numerous infrastructure projects, while Poland is seeing substantial investments in road and railway infrastructure.