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Housing construction in the eurozone has declined at the fastest pace since the pandemic started after rising interest rates and high inflation hit building activity, according to a closely tracked survey.
Soaring borrowing costs, following an unprecedented rise in the European Central Bank’s policy rates in the past year, have suppressed demand for new mortgages, reduced house prices and combined with higher inflation to raise the cost sharply of building new homes.
The HCOB eurozone construction purchasing managers’ index, which tracks total activity in the sector, edged down from 43.5 in July to 43.4 August, its lowest level so far this year, taking it further below the 50 level that separates growth from contraction.
Housebuilding declined at the fastest pace since April 2020, according to the survey, while commercial construction and infrastructure activity also declined but at a slower pace. The decline in overall construction was steepest in Germany, but it also fell in France and Italy.
“This is not a good time to be in construction in the eurozone,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. “Especially those companies focused on the housing sector find themselves in a tough spot.”
The decline in building activity, which makes up about 9 per cent of eurozone output, will further weaken the outlook for the bloc’s economy as economists warn it risks shrinking in the second half of the year.
House prices in the eurozone fell 0.9 per cent in the first quarter from a year ago, the first fall for more than a decade, reflecting a jump in borrowing costs. The average rate for a new fixed-term mortgage of at least 10 years has more than doubled from 1.32 per cent at the start of last year to 3.45 per cent in July, according to the ECB.
The PMI survey found new orders in the construction sector fell for the 17th consecutive month, although the decline was the softest since February. Input prices increased at a slightly faster rate, albeit below the long-term average. Delivery times fell for the fourth month running.
Construction companies cut jobs for a sixth consecutive month in August, at a faster rate than in July, reflecting a continued fall in confidence about the outlook for the year ahead.
The survey results came as business lobby groups called on the German government to intervene to help the crisis-hit construction industry, after a wave of insolvencies claimed a number of high-profile property developers in the country.
Several German developers have filed for insolvency in the past few weeks, among them three Düsseldorf-based commercial real estate firms Gerch, Centrum Group and Development Partner, as well as Euroboden of Munich and Project Immobilien Gruppe of Nuremberg, which build both residential and commercial property. Big landlords such as Vonovia and Aroundtown have announced big writedowns of their property portfolios.
The cost of building new residential properties in the eurozone rose 11.5 per cent last year, the fastest pace on record, according to a separate index of producer prices in the sector published in July by Eurostat, the EU’s statistics arm.
Production in the eurozone construction sector was down 1.1 per cent in the second quarter compared with the previous quarter, after rising 2.6 per cent in the first quarter, according to the latest data.
There was more gloomy news for the eurozone economy on Wednesday as retail sales in the bloc fell 0.2 per cent in July from the previous month, which Eurostat said took the year-on-year fall to 1 per cent.