Despite significant challenges, the residential construction sector has shown resilience, and lower interest rates could help revive prices and activity in 2025. Throughout 2024, housing starts and residential building permits have declined in most countries. However, real estate prices may have reached their lowest point following a major correction across many markets. We anticipate prices will rise by 1% in France, Italy, and Spain in 2025, with increases of 2% expected in Germany and the Netherlands. As a result, housing affordability has improved in most countries due to wage growth. Germany remains the weakest market in Europe, with building permits down 22% year-on-year as of Q2 2024, alongside the steepest price correction. In the U.S., new housing construction decreased by 8% year-on-year in the first half of 2024, but prices saw a slight uptick. The renovation market grew due to strong demand for energy-efficient improvements, though it is likely to slow as government subsidies and support programs are scaled back in 2025.

Falling interest rates could provide a boost in 2025. We estimate that a 1 percentage point drop in mortgage rates would lead to a 3 percentage point increase in residential building permits in Italy, 5 points in France, 6 points in Spain, 8 points in Germany, and up to 19 points in the U.S. Moreover, lower policy rates tend to pass through to mortgage rates relatively quickly—often within a few months. In some cases, banks have already started reducing rates in anticipation of central bank rate cuts, aiming to attract clients early. Over the course of a full loosening cycle, which could result in a 2 percentage point reduction in rates by fall 2025, this would significantly boost residential construction.

Learn more here: https://www.allianz.com/en/economic_research/insights/publications/specials_fmo/241022-construction.html