What’s behind Europe’s recent residential construction business is in a major slump? Surging construction prices and high interest rates are putting immense pressure on housing, leading to an expected sharp decline in new construction. This drop will likely increase house prices and deepen the housing crisis, especially in cities already facing shortages.
Construction costs have been rising steadily since 2015, accelerating after the pandemic. Building permits, however, varied across the countries. Most building permits were issued in 2006 and 2007, before the financial crisis. Since then, the sector has not reached those peaks again.
The situation varies across European cities. Some countries saw the biggest drop in building permits in 2009 during the financial crisis, while others are now issuing more permits than ever. In Greece and Spain, heavily affected by the 2009 crisis, recovery has been minimal.
Germany, on the other hand, saw a stable increase, with the highest number of permits granted in 2021.
In 2022, Cyprus and Luxembourg had the highest number of new building permits per capita, but Luxembourg has since seen a significant drop, prompting the government to introduce new tax incentives to boost the sector.
Despite the spike in construction costs across Europe, this has not directly impacted building activity. According to Eurostat, residential building costs in the EU rose by 31% from 2015 to 2022, with Bulgaria experiencing the sharpest increase at 96%. Germany, the largest EU economy, saw a 37% rise, slightly above the EU average.
The increase in costs is mainly due to higher input material prices, driven by high energy prices, inflation, and supply chain disruptions after the pandemic and the war in Ukraine. Raw material prices nearly doubled compared to pre-war times.
While market analysts and developers often suggest that construction costs and building activity impact housing affordability, data from many countries suggests otherwise. For instance, although construction costs in Czechia have risen slightly above the EU average, this does not explain why Prague is currently the least affordable European capital for housing.