Residential Construction in Europe

According to LBS Research (the think-tank of LBS building society), Germany has far too few housing starts relative to both demand and to all other European countries.

In 2008, 175,000 permits for housing starts were issued. Based on 40 mio households, that's equal to 0.45 % of existing households. For 2009, the number is expected to be flat, probably contracting slightly.

In terms of housing starts per 1,000 population, Germany is at the bottom of the list (figures refer to 2009 forecast):



In particular, it is projected that the UK will still see slightly more housing starts than Germany in spite of the real estate bust, and both Spain and Ireland will continue to have three times as many housing starts (in 2007, both countries apparently had seven times as many housing starts as Germany!).

LBS argues that yearly demand over the next 15 years will be 270-350,000 new housing units, or 50-100 % more than current construction volumes. Otherwise, there will be sharp increases in prices and rents in many regions of Germany.

But why would so much new housing be needed?

- Overall population has been contracting slightly (at 0.1-0.2 % p.a.), and this decline will accelerate, unless net immigration picks up sharply, which seems unlikely.

- LBS Research argues that the number of households will continue to grow. No reasons are given, except a nebulous reference to "demographics". What will indeed happen is that the absolute number of working-age people will go down, whereas the number of old people (65+) will increase. As old people are more likely to eventually live alone due to the death of a spouse, this could explain the projected increase in no. of households. However, single old people are much more likely to move to smaller apartments or retirement homes, so I don't think that a statistical increase in the number of households necessarily implies bigger housing demand.

- If internal population movements continue (away from East Germany and rural regions, towards Southern Germany and big metropolitan areas), this would imply that more and more housing is vacant in parts of the country, while additional demand is created in growing regions.

- LBS Research points out that 150-200,000 housing units will be demolished or changed to office-use every year. I don't quite see why that number should be so big. And in any case, most of the demolished units are related to oversupply in East Germany (if you add housing demand due to population movements and due to demolished apartments, you are double-counting). As for "change to office use", that won't be too frequent considering the oversupply of commercial real estate.

- LBS Research argues that their assumed "loss" of housing units only equals 0.4-0.5 % of all units annually, i.e. a 200 year life-span per housing unit. However, this argument is based on a "long-term equilibrium" that doesn't make much sense for German housing: After the war, most of urban housing was either newly built or thoroughly renovated, i.e. the overwhelming majority of German housing stock is less than 50 years old. And even much of the old housing stock is in pretty good shape (the house my grandmother got born in is more than 100 years old now, and it's far from being a candidate for the wrecking crew).

Summing up, I don't believe that housing starts equal to 0.4 % of existing stock are objectively too low. Unless internal population movements accelerate (more people moving to growing regions), or net immigration picks up sharply, I don't think there is a major risk of an impeding housing shortage.

So what about the comparison to other European countries?

In recent years, many of the countries with lots of building activitiy have seen population growth, mostly due to net immigration. In addition, many European countries have seen a trend to much larger living space per household (creation of bigger apartments, more houses instead of apartments), and most countries have an older average age of housing stock than Germany does (mostly due to the war, but also due to lots of German building activity in the 90s, due to large-scale immigration from Eastern Europe).

I do find it bizarre that Spain and Ireland are still at the top of the list for 2009 building activity. Either the forecast is too optimistic, or their construction industry hasn't reached the bottom yet: Ireland is probably experiencing a population decline in 2009 and 2010. Why would it need housing starts equal to more than 1 % of existing housing stock?