Demand Shortages Replace Supply Shortages in Europe's Construction Sector

Demand shortages are replacing supply shortages

In August 2023, 9% of all EU contractors indicated lower production due to delayed delivery or lack of building materials. Shortages are now abating due to the easing of supply chain problems in the economy and are almost at the average of the last 10 years. Another factor limiting production, but with a more structural nature, is the availability of sufficient labour. In a recent European Commission survey, almost 30% of EU contractors cited this as problematic – particularly those in Austria, France and Germany.

While material shortages are easing, a lack of demand is increasingly becoming a new limiting factor for many contractors. 28% of EU building companies are facing a lack of demand as the most significant factor in production limitation, the share of which has been rising over the last year. Belgian and Dutch contractors are experiencing the lowest demand restraints.

 

Demand restraints are increasing while limiting supply factors level off

% EU construction firms that have to limit the production because of (labour and material shortages cumulative)

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High price increases are over
Fewer contractors are increasing their sales prices due to the lower costs of some building materials. The reasons for these lower price increases are diminished supply chain disruptions and weakening demand. Contractors no longer have to pass through higher input prices or encounter a higher level of competition – particularly in Austria and the Netherlands. In August 2022, approximately 65% of companies in these countries responded to surveys that they were scheduling sales price increases. This figure dropped to just 8% in Austria and 20% in The Netherlands in August this year. In Germany, the majority of building firms now plan on decreasing sales prices.

 

 

Number of contractors that wants to increase prices is diminishing fast

Balance of construction companies in the EU that expect to increase -/- decrease output prices (over next 3 months)

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Residential building permit issuance plunges

The number of approved permits has decreased over the last two years. In the first quarter of this year, there was a decline of almost 8% in issued permits for residential buildings compared to the same period two years earlier. Higher interest rates and a weaker economy are causing home buyers to take a more hesitant approach to purchasing.

While some building material prices have decreased in recent months, higher building costs still remain. This has made new buildings more expensive and new project developments less profitable. To make matters worse, existing house prices are decreasing in many countries, making newly built residences relatively even more expensive for buyers. As a result, developers are reluctant to start new projects and we're therefore seeing a lower number of issued permits.

 

EU permits new homes declining, expect for Spain

Building permits, number of new dwellings, (index 2019 Q4 =100, SA)

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Highest decrease in Austria
Austria has seen the steepest decline in the number of issued permits for new houses, which has almost halved in the last two years. Alongside higher interest rates and building costs, this is due to the end of housing subsidies for new housing construction. Belgium, Germany, the Netherlands and France all saw a drop in issued permits of between 20% and 50% in the same period.

 

Enormous permit increase in Spain
Spain is the outlier in this area, with the number of residential building permits skyrocketing over the last couple of years. In the first three months of this year, it was more than 2.5 times higher than two years earlier. The question is, of course, whether all these projects are going to be accomplished. As the real estate market cools down, the sales of new houses are under pressure as well. However, it remains a positive sign for Spanish construction after years of decline.

 

A temporary setback but growth ahead
The issuance of permits is a strong indicator for future production, and as the number decreases, we expect declining volumes in the new residential sector this year and next year. However, huge housing shortages in many European cities should ensure sufficient demand in the residential sector in the long run.