Quand le bâtiment va, tout va? A positive 2015 for the European residential construction industry

04 march 2016

luca.agolini@prometeia.com

Residential investment has positively contributed to growth in most European countries, with the significant exception of France. Prospects remain favourable, however, there is no shortage of risk factors.

 

In 2015, the resumption of the construction activity extended to almost all Western European economies, albeit with heterogeneous situations across the principal markets. 

Germany
The residential investment boom has continued, even if with an irregular trend: after the standstill in the second and third quarters of the year there followed a strong rebound in the last three months (partly influenced by the favourable weather conditions), for an average annual increase of 1%. Irrespective of the seasonal volatility, the underlying dynamics of the German construction industry remain positive, especially with regard to new dwellings. In fact, the factors supporting the expansion of the demand for housing appear to be far from exhausted - from the improved employment conditions and household income to mortgage rates at historically low levels - to which are added the impulses resulting from the favourable demographic dynamics and from the migratory flows. Specifically, the recent acceleration in the influx of refugees, as estimated by the Bundesbank, will have an impact on the demand for housing units in the medium-term. 

As anticipated by the economic indicators – particularly by the sharp rise in building permits in the final months of last year [1] – the positive trend of the residential construction industry in Germany is expected to continue in 2016. The main risk is connected to emerging signs of overheating in a few markets (especially in the major urban areas). The construction activity could also be hindered by the increase in construction costs, in turn ascribable to the reduced availability of building plots and to the more stringent requisites relative to the energy performance of property.

United Kingdom
The dynamics of residential investment indicate a positive trend (on average more than 3% in 2015), despite clearly slowing down as compared to the exponential growth of the previous year. The slowdown has affected both the area of the new dwellings as well as the restructuring area and may be attributed to a partly cooling real estate market - as a result of the restrictive measures that entered into force during 2014 - aside from the persisting structural constraints affecting the expansion of the housing supply. “Bottlenecks” that have continued to exert upward pressures on prices – specifically in the London area – accentuating the indications of overestimation of the residential real estate market. 

Despite the risks of overheating, more recent information enables the prefiguration of a recovery in investment growth, sustained by the resumed granting of home mortgages and by the new incentives for households for the purchase of a dwelling [2]. Instead, an element of uncertainty is related to the impact on the real estate market (particularly for the "but-to-let" area) of the announced tightening of the tax scheme in regard to the real estate market, with the exception, at least for the time being, of the repercussions on the area of a potential "Brexit".

Spain 
In the course of 2015, the trend reversal of the Spanish construction industry became consolidated, even if after the leap in the second quarter the economic viewpoint of residential investment settled in the subsequent quarters at a more moderate pace, for an average annual increase of 2.4%. The renewed vibrancy of the real estate market has contributed to this recovery, with prices and the buying and selling of real estate returning to a positive growth, also driven by inflows of foreign capital towards Spanish real estate. In the coming quarters, a continuing cyclical recovery of the investments is expected, at levels in any case halved compared to the peak preceding the bursting of the housing bubble. Nevertheless, with the big unknown of a considerable stock as yet unsold (estimated at around 600 thousand dwellings), that could undermine the projected growth. 

France
In an overall positive scenario for the European construction industry, the chief exception is represented by the French market, enduring an extended recession, ongoing since mid-2010, even if with a less pronounced rate of contraction in residential investment compared to last year (on average -3.3% in 2015). The weakness of the construction activity has been affected by the more general income crisis and by the collapse in demand from families - with the aid of fiscal consolidation policies and the difficulties characterising the employment market -but above all the deterioration of the real estate market, that has experienced an extended correction, in terms of quantity and quotes alike. In any case, the economic indicators tend to anticipate the possibility of a trend reversal as from 2016. The building permits are positively oriented and signs of reawakening of the transactions of new dwellings may be observed (apartments in particular). A boost for the recovery of this area may derive from the relaunch measures enacted by the government, such as the "Duflot device", providing tax relief on the purchase of real estate to be leased, subsidy schemes in favour of less privileged categories and incentives for the energy redevelopment of buildings. In any case, the pace of recovery of this market will be moderate, also in that bound to the gradual drop in the listings on values that are less overestimated. 

 
Fig. 1 - Housing investment (index, q1 2010=100)
Fig. 2 - Real housing prices (index, q1 2010=100)
 
Sources: National Statistics, Oecd.
 

[1] The trend of building permits is ascribable, at least in part, to an anticipation effect in view of the tightening of requirements relating to the energy performance of the new buildings as from the beginning of 2016. 

[2] Bonus (“Help to buy ISA”) for the purchase of the first home.

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