Growth returns to Europe’s construction sector

We expect a marginal increase in total European Union construction volumes this year, but don't get too excited; we're looking at a figure of just 0.5%. This follows a 2% decline in 2024. Optimistic signs are slowly becoming visible. Monthly construction volume data was already showing some growth in October and November last year. House prices of existing houses began to increase in 2024, and that's giving home developers the opportunity to demand higher prices for new buildings, enabling them to cover the costs of the increased building material prices from recent years.

It looks like the lowest point has been reached

That said, contractors are still pessimistic about the size of their order books, but it does look as though the lowest point has been reached. The issuance of building permits was somewhat disappointing in the third quarter of 2024. However, the sharp decline we saw earlier has stopped, and compared with the same period in 2023, it actually grew, albeit marginally.

We foresee a structural demand shift in growth for the renovation subsector (including sustainability works). We also expect that investment 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.

Due to 2024's production decline, fewer contractors have been experiencing labour shortages, but it's still a problem. Back in December, a quarter of all EU construction employers still complained about not having enough construction workers, although that was down from 32% in December 2023.This a structural problem due to an ageing workforce. Companies need to invest in efficiency gains (industrialisation and digitalisation) to solve this long-standing issue. Due to the sluggish economic situation, building firms increasingly mentioned a lack of demand. This only marginally declined in the last month of 2024.

The price of existing homes within the EU started to increase again in 2024 after declining the previous year. The latest Q3 2024 data shows a price appreciation of 1.5% and that means the price of existing EU homes reached a new record level. It's a good sign for new developments as house prices of newly built and existing homes normally follow each other closely; they can’t deviate too much as new and existing houses are substitutes for consumers.

A large gap between new and existing house prices

That said, in the last couple of years, we have seen a drift between the cost of new and existing homes. Since building costs increased, developers weren’t able to reduce prices, which resulted in a decline in their competitiveness, a decline in sales of new houses, and lower production. Yet, the gap between new house and existing house prices is still large but marginally decreasing. When this process continues, it can stimulate the residential building sector.

As always, there are significant differences among countries. The biggest gaps are in Germany, Spain and Turkey. These large price differences make newly built homes less competitive in these countries. The Netherlands stands out as the only country in our analysis where the prices of existing houses have already outpaced the prices of new builds. This makes Dutch new houses attractive for homebuyers and allows developers to increase sales prices to cover their increased building costs of the past.

Few contractors were planning to increase their sales prices at the end of 2024. Due to the decline in production, contractors no longer have to pass through higher input prices and encounter more competition. Nevertheless, there has been a slight increase in builders who want to increase prices. This could be due to the construction market slowly improving and increasing gas prices, which can make energy-intensive building materials more expensive.

We've particularly not seen major price increases in Germany and Spain. In December 2024, just around 1% of German companies were planning to increase their sales prices. In France, the majority were even planning to decrease them due to sluggish demand. In comparison, high price increases are expected in the Netherlands, Poland, and Turkey, and, in the latter case, this reflects the country's far higher inflation rate. In the Netherlands, demand is really improving, resulting in opportunities for builders to charge more

The infrastructure sector is more resilient to the economic cycle as investment mainly comes from local or central governments. Infrastructure investments in the EU showed moderate growth in 2023 of 3.2%, and it's estimated to be 1% in 2024. The subsector benefits from needed investments in the energy transition, especially for new power grids and digital infrastructure. Opportunities also arise in the field of drinking water, as population growth and climate change lead to more frequent dry periods in many places; we need more waterworks!

Engineering developments are another growth indicator in the infrastructure sector. It's upstream in the value chain and provides direction for infrastructure investment. Engineering companies were creating increasing volumes at the end of 2024. We, therefore, also expect that the infrastructure sector will perform positively in 2025 and 2026. It's the only sector where the producer confidence indicator is positive.

In Spain, civil engineering is benefiting from Next Generation EU funds, leading to the launch of numerous ready-to-go infrastructure projects long delayed by resource constraints.

EU funds encourage growth of infrastructure sector

In Poland, substantial investments in road infrastructure bolstered growth in 2023, but that came to an end in 2024. Additionally, several previously delayed railway projects are anticipated to start off in the coming years, further driving progress. The execution of numerous planning projects will be fostered by removing the access restrictions by the European Commission that blocked the utilisation of allocated EU funds. Yet, it took some time before some of these projects materialised. So, we're confident that although Poland's infrastructure sector declined in 2024, it will pick up again in 2025.