UniCredit Bank Austria analysis:
Construction economy loses share of economic output
- Investment in construction has increased by a price-adjusted 14% over the last 30 years, with economic output increasing by 67%
- Investment in construction will in future focus more on renovations and less on new build projects – for residential construction as well as for commercial construction and civil engineering
- The growth in the number of households and the need for new housing stock is weakening
- Having reached a record level of 75,000 homes in 2021, construction in Austria is expected to decline to fewer than 50,000 homes per year by 2025
- The decarbonisation of building stock requires a substantial increase in renovations – something that high construction costs and a shortage of skilled workers are currently making difficult
- Extending building lifetime and repurposing existing buildings can both make a key contribution to the conservation of resources in the construction sector, and they both result in fewer new build projects
Investment in construction in Austria has been diverging from economic growth since the 1990s. Investment in construction has increased by a price-adjusted 14% over the last 30 years, with economic output increasing by 67% over the same period. Construction is likely to decline still further in importance compared to other sectors of the economy. Firstly, demand for new build construction projects is slowing due to the high volume of housing stock with very good building fabric. In addition, despite increasing automation and the use of prefabricated components, the sector is only able to achieve small productivity gains when compared with the economy, particularly in those segments that are particularly personnel intensive.
"Investment in construction is likely to decline over the next two years. Demand for construction is expected to only slowly begin to increase again in 2025, when stronger recovery in economic growth and catch-up effects in residential and commercial construction are likely to take effect – though it should be noted that increases above macroeconomic growth are becoming increasingly rare", says UniCredit Bank Austria Economist Günter Wolf.
Investment focus moving away from new build projects towards renovations
Demand for affordable housing and the necessary investment in adapting building stock, transport infrastructure and energy supply to meet climate policy goals will secure a flow of orders from the construction industry over the medium to long term. By contrast, demand for new retail units and office buildings in particular remains subdued, as usage concepts for buildings in these segments are increasingly uncertain given the prevalence of online platforms and new ways of working. Even with public building construction, which accounts for around 20% of civil engineering production, post-2023 planned investments by BIG, the Austrian federal real estate company, are only likely to increase in the area of new school and university buildings, and then only slightly. Public-sector clients are likewise focusing on building renovations.
Furthermore, there are no significant new construction projects in the pipeline for major road construction, and infrastructure investments by the Austrian Federal Railways (ÖBB) are likely to be scaled back. According to the 2023 budget report, spending will fall from EUR 3.2 billion to EUR 3.1 billion by 2028, largely because the main construction phase for the major tunnel projects is now complete.
The growth in the number of households and the need for new housing stock is weakening
Residential construction activity has been particularly strong in recent years, with 2021 seeing record completion of 75,000 homes – this certainly addressed the sharp increase in demand for housing. Housing construction in Austria will shrink considerably in 2023 and 2024, slowed by uncertainty about property price developments, high construction costs and higher interest rates. Euroconstruct expects the number of homes completed in Austria to fall to around 50,000 units by 2025.
Given the decline in new build construction in the residential sector and the sudden increase in households as a result of the influx of refugees from Ukraine in 2022, demand for new housing will certainly increase again. That said, recent budgetary forecasts suggest that demand for housing is not likely to accelerate strongly in the coming years. The number of newly created households, which averaged 38,000 per year between 2012 and 2022, is expected to decline to 26,000 households per year by 2030. At the same time, the number of completed homes, which averaged 66,000 units between 2012 and 2022, is expected to fall below 50,000 units again from 2025 onwards.
Demand for new housing should therefore largely be met purely in terms of volume. It remains to be seen, however, whether the expected level of new build construction will also meet demand in each specific sector – and in particular whether there will be an adequate supply of affordable housing.
Climate protection brings positives and negatives for construction industry
Building materials production and construction and operation of buildings and infrastructure account for around a quarter of Austria's greenhouse gas emissions (excluding fuel consumption in the sector, which in 2021 accounted for around 19 out of 78 million tonnes of CO2 equivalents). Almost two-thirds of this figure is attributable to the operation of the buildings, including heating, cooling and hot water provision; the rest is attributable to the production of building materials.
The climate protection measures in the building sector focus primarily on the thermal renovation of the housing stock. The goal is to increase the renovation rate for residential buildings from the current level of 0.7% to 2% per year by 2030 and by 3% per year by 2040 according to the government programme; the aim of this measure is the decarbonisation of the building stock. In the short term, the severe shortage of skilled workers and the high construction costs are preventing any substantial increase in renovation works. Order cancellations in the building renovation sector rose from an average of 1% of the order volume before 2022 to representing 5% and 14% of said volume in 2022 and by April 2023 respectively.
The finishing trades are particularly affected by the shortage of skilled labour. Since 2021, for instance, there has been an average of just one electrician or plumber registered as unemployed per job vacancy (in the construction trades, there are more than three people registered as unemployed per job vacancy). Back in July 2023, almost 40% of companies operating in the finishing trades cited the shortage of employees as the main obstacle to production. There is no quick solution in sight to this shortage of skilled workers.
Furthermore, although the increase in construction costs has slowed somewhat, energy-intensive constructions materials will remain expensive (in mid-2023, material costs for residential construction were still 30% higher than in 2019). In addition, the climate protection measures result in persistently high energy prices and expected increases in CO2 certificate prices. More subsidies will certainly be required if long-term renovation goals are to be achieved (based on expenditure of around EUR 500 million for renovation of housing stock in 2019, an increase to at least EUR 1.5 billion per year by 2030 – based on 2019 prices).
Construction is also one of the biggest resource consumers and accounts for almost two-thirds of waste in Austria. "Extending building service life and repurposing existing buildings will make a significant contribution to conserving resources in the construction sector and to reducing the volume of land being built on. This is another factor that is likely to lead to a reduction in the volume of new build construction in the construction and civil engineering sectors", concludes Wolf.
Enquiries:
UniCredit Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel.: +43 (0)5 05 05-41954
Email: guenter.wolf@unicreditgroup.at