EU Construction Outlook: Strong decline this year but signs of recovery in 2025

We expect a decrease in EU construction volumes this year (-1.5%). This is a down on our previous forecast (-0.5%), mainly because of revised Eurostat data. The European data office recently upgraded the 2023 EU Construction figure from 0.1% to 1.4%. Growth has therefore lasted longer than we expected, and as a result, the decline started later, leading to a larger-than-expected contraction in 2024.

However, the optimistic signs – noted in our previous forecast – are becoming more visible. House prices are increasing further in many countries and the issuance of building permits has risen. In addition, at the beginning of the construction value chain, it looks like the producers of building materials (eg. concrete, cement and bricks) have passed the lowest point of production volumes.

Due to long lead times, new residential and non-residential building volumes will still decline in 2024 with home buyers and firms continuing to avoid investing in new premises. However, for the renovation subsector (including sustainability works) we foresee structural growth in demand. We also expect that investments in infrastructure will continue to grow. The main drivers for this growth will come from the EU Recovery funds, investment in digital infrastructure, waterworks, extensions of the power grid and the energy transition.

For 2025, we expect the above-mentioned growth trends in the renovation and infrastructure sector to continue. We also expect the new building sector to slowly improve due to the recovering housing market and the increasing amount of building permits for new homes. The result will be that growth will return to the construction sector in 2025.

In many EU countries, house prices have started to increase again, after a period of decline. Structural housing tightness, especially in cities, is supporting demand. Increasing wages and (marginally) declining mortgage interest rates make it possible for house buyers to borrow more, thus driving up house prices.

For instance, in Poland, prices of existing homes went up by more than 4% in the first quarter of the year. During the same period, house prices in Spain and the Netherlands increased by 2%. Yet, in Germany, where the economic situation is more sluggish, house prices declined (by -1.1%).

Development of prices 
Higher prices of existing houses are good for new residential building volumes, although this will take some time to materialise. Sales prices of new houses are closely related to prices of existing houses as they are often substitutes for consumers who are in the market for a new home. Therefore, price developments of the two can’t and won’t diverge too much in the medium and long run. So, when house prices of existing houses increase again, this also gives the opportunity for project developers to increase the sales price of newly built houses. This is also what we see happening. In addition, building material costs have almost stabilised in the last year, which makes it easier for developers to make projects profitable again. Therefore, more housing projects can be carried out.

Prices of new houses are increasing in most EU countries. Poland and Spain have witnessed the highest price increases in newly built homes during the past quarters. In France and Germany, house prices of new builds (and existing houses) are still declining. The Netherlands also experienced a modest decline in newly built house prices in the first quarter. As Dutch house prices have increased to high levels before and Dutch house prices of existing houses are on the rise again, we see this as a one-off movement.

Now that demand for new-build houses is increasing, it is supply that will become the main limiting factor in many countries due to shortages of building land, financial issues, complex project development and/or legal delays. Yet, after two years of decline, the issuance of EU building permits has been rising since the third quarter of 2023 and increased by 6.6% in the final quarter of last year and by 1.5% in the first quarter of 2024. High recovery rates of issued building permits are mainly being seen in Spain, Poland and the Netherlands.

The data doesn’t show any real improvements yet in France and Germany. French and German project developers and building companies are still reluctant to commit to new projects as the housing market in these countries is still sluggish compared to other EU countries. However, housing shortages in these countries will also ensure sufficient demand in the residential sector in the long run.

Permit issuance for non-residential buildings starts to drop
The issuance of permits for non-residential buildings has shown only a marginal decline in the last two years. However, the slowdown of economic growth, higher interest rates and geopolitical and economic uncertainty have made companies hesitant to invest in new premises.

In addition, during the Covid-19 crisis, there was an enormous rise in e-commerce which increased the demand for new logistics centres. Now, that this surge is over, the demand for new storage facilities is declining to more structural levels.

Nevertheless, other subsectors in the non-residential sector have partially counterbalanced the decline. Public spending on buildings for education and health has stabilised aggregate demand in the non-residential sector. As the European economy is slowly recuperating and interest rates have decreased a bit, we expect that the outlook for the non-residential sector will also improve slightly. However, it always takes time before these growth rates become visible in building volumes. We therefore expect that the non-residential sector will start to grow in 2025 after some decline this year.

From a historical perspective, demand for renovation and maintenance has been remarkably volatile in recent times. During the first Covid-19 lockdown, people were reluctant to have handymen in their homes. This gradually changed and demand for improvement grew rapidly in 2021 as many people suddenly required a “home office” since remote work became the norm. In addition, consumers had spare money to invest in their homes as they couldn’t spend their savings on holidays.

In 2022, skyrocketing energy prices decreased consumers’ purchasing power. This resulted in a downturn in the number of people who wanted to refurbish their homes. In contrast, the demand for energy-efficient investments (eg. solar panels, insulation and heat pumps) temporarily grew as the payback period for these refurbishments dropped enormously.

Stable growth will return in the renovation sector
All in all, despite the temporary circumstances caused by the Covid-19 pandemic and the energy crisis, the trajectory for residential energy efficiency and sustainability upgrades remains promising. Looking ahead, we expect gradual growth in the renovation market due to sustained government regulations and the structural impact of higher energy prices. Therefore, demand for residential energy efficiency upgrades is likely to return to its upward trend. Consumers also indicate in surveys that they expect to improve their house in the coming months. And after the volatile Covid and energy crisis period, this indicator is slowly moving back to its structural upward trend.

The number of insolvencies among EU contractors has steadily increased and has reached pre-Covid levels. The number of bankruptcies was surprisingly low during the Covid-19 period due to the massive intervention of governments to compensate for the effects of the loss of activity. Furthermore, the construction sector was modestly affected by the pandemic in comparison to other sectors, like hospitality and aviation.

Two countries stand out. In Poland, bankruptcy levels remain low due to relatively favourable market conditions. In Spain, insolvencies of building companies increased during the Covid crisis and this trend has persevered. That’s probably because the contraction of construction volumes in Spain was relatively high during the pandemic and the fiscal measures in Spain were limited compared to other hard-hit countries. In addition, in September 2022, a new Spanish law on insolvency was finally passed, which gives creditors more power. Restructuring processes that previously got stuck in court can therefore be handled faster and this could have resulted in more bankruptcies.

Since the third quarter of 2023, the level of bankruptcies in the EU construction sector has remained stable. We expect that the number of EU building companies that have to close their doors will more or less stabilise at this level during the remainder of 2024 and 2025. Price increases in building materials have mostly stopped and, as mentioned, demand will slowly pick up in the coming quarters.