Source: Euroconstruct

Ifo, the German Institute for Economic Research at the University of Munich, said on Thursday, that the financial and economic crisis has had a particularly negative effect on the residential real-estate market. New construction is expected to weaken by about 20% and it's estimated unsold housing units in Spain amounts to about 1 million. Poland is the star performer, with a market worth almost €46 billion - - Ireland was €38 billion at the peak in 2007.

Earlier this week, Goodbody reported earlier this week, that the number of Irish second-hand houses for sale on the Daft.ie website, was 57,000 - - equivalent to 19 months supply at current sales rates compared with 9 months in the US.

Separately Ifo reported that the credit constraints for German industry and trade clearly sharpened in July. Currently 45.1% of the surveyed firms assess banks’ lending policies as restrictive compared to 42.4% in the previous month. In all the surveyed economic sectors, complaints of strict credit awarding practices by the banks has increased – in manufacturing, in construction as well as in wholesaling and retailing. In the assessment of firms of all sizes, access to credit has become clearly more difficult. Despite the expansive monetary policy of the ECB, banks have become more restrictive in granting credit. One reason for this is the massive losses of equity capital of many banks in the wake of the financial crisis. The danger has grown that the hoped-for recovery will be prevented by an undercapitalisation of the banking system.

In manufacturing reports of restrictive lending policies have increased in firms of all size categories. Among the large firms, 53.6% of the survey participants regard credit policies as restrictive compared to 50.9% in June. Of the medium-sized firms 43.8% are currently experiencing difficulties in credit negotiations compared to 40.7% in June. Especially for the small firms, the credit constraints have increased significantly, from 39.7% to 43.5%.

In construction 47.0% of the firms see credit access as restrictive compared with 45.5% in June. For wholesalers and retailers, 42.5% report restrictive lending policies; in June it was 39.9%.

European Housing Construction Plunges

Ifo said on Thursday, that the financial and economic crisis has had a particularly negative effect on the residential real-estate market. In addition to new construction, which is expected to weaken by about 20% this year, the construction sectors “renovation and modernisation” has also been affected by the crisis. Construction measures on existing housing units, however, are expected to decline by only about 3½ percent. Demand will remain weak into the year 2010. In 2011 at the earliest some recovery in the whole sector of residential construction will occur. This is one of the main results of the 67th Euroconstruct Conference, which was held in Warsaw.

Prices for new housing construction have fallen and unemployment has risen in most European countries; at the same time banks have become increasingly restrictive in their lending policies. This has been a major contributor to the clear decline in construction activity.

Ifo said Spain and Ireland have been particularly hard hit by the plunge in housing construction, where construction far exceeded actual needs in the past boom phase. Market observers estimate that the number of unsold housing units in Spain amounts to about one million. As a result, the number of building permits has declined dramatically - - from 915,000 in 2006 to about 250,000 in 2008.

In Germany the construction of new housing has been weak in recent years  - - despite the economic upturn, falling unemployment and moderate mortgage rates. In 2008 only about 152,000 new housing units were completed, the lowest figure since German Unification. Ireland built 92,000 housing units in 2006 (88,000 ex-social housing).

“Nevertheless, the housing supply is good, on the whole, albeit with large regional differences,” said Ludwig Dorffmeister, construction expert at the Ifo Institute. A housing shortage, due to low levels of new construction and migration induced by employment prospects, is only a danger in a few regions. Other regions have vacancy rates of more than 10%.

Construction output across the 19 countries in the Euroconstruct network is projected to fall by 7.5%, following an estimated decline of 3.1% this year. Output is expected to fall further in 2010 (-1%) meaning a three-year recession for construction. A gradual recovery is expected in 2011 (+1.6%).

The market across Western Europe is in a very weak position. The volume of construction output in the 15 Western European countries is expected to contract by 8% this year and a further 1.5% next year, following an estimated decline of 3.6% in 2008. Thus the overall construction market in Western Europe will have reduced in size by 13% by the end of 2010 compared with the peak in 2007.

The worst performers over the next two years (2009-2010) are expected to be Ireland, where the industry is projected to reduce in size by 51%, Spain (-25%), Finland (-21%) and Portugal (-18%). Only Switzerland (+2.3%), Germany (+1.1%) and Sweden (+0.5%) are expected to record growth over this period. Overall the market is forecast to recover by only 1% in 2011. James Hastings, head of construction futures at Experian, the UK representative of Euroconstruct comments: “While countries such as Germany were not nearly so exposed to ‘toxic’ debt as the UK, their export-led growth has been badly hit by the decline in world trade, with a consequent knock-on effect on construction activity.”

Euroconstruct said , looking at the Central and Eastern European countries, the star performer is Poland, with a market worth almost €46 billion (Ireland was €38 billion at the peak in 2007) where the industry is projected to increase in size by 16% in the two years to 2010. Much of the impetus in Poland is coming from the new civil engineering sector, almost 30% of the total market, where substantial investment will drive growth of 65% over the next two years.

The forecasts for the market as a whole have been revised downwards compared with the forecasts made last December due to the worsening global economic environment and the uncertainty regarding the approaches being taken by banks and governments to deal with improperly functioning credit markets.

Members suggest that the Euroconstruct housing market continues to be characterised by a significant contraction in mortgage lending and housing transactions as well as rising unsold stock levels, weak supply and falling house prices in many countries. Furthermore the prospect of further job losses - with unemployment levels projected to rise in every Western European country (except Austria and Italy) and in Poland between 2009 and 2011 – may extend the length of time before the housing market moves into the recovery phase.

The weaker economic forecast for the Euroconstruct area as a whole is expected to lead to a decline in the total number of units constructed in the Euroconstruct Area to 1.73 million this year, 5.4% below the corresponding estimate for 2009 last December and 34.1% below the peak year total of 2.62 million in 2007.

According to Annette Hughes of DKM Economic Consultants, the Irish member of Euroconstruct, “the much greater adjustment now underway across the sector as a whole and not just in residential construction, where the adjustment commenced, has exacerbated the downturn. As a result the contraction in construction output is now expected to be 1) more severe and 2) last longer compared with the December 2008 forecast. Output in the industry was expected to stabilise in 2010 in the December forecast, but is now unlikely to return to a positive growth path until after 2011.”