Construction turnaround on hold, housing construction to decline further

Growth in construction failed to materialize last year and again at the beginning of this year. The likelihood of a turnaround has decreased due to the conflict in the Middle East. In its economic review, the Finnish Construction Industry Association (RT) predicts that housing starts will continue to decline this year and will remain almost unchanged at a historically low level next year.

Last year, construction decreased by 1,5 percent, and this year, at most, the same amount of growth is expected. Construction turnover has increased, but it has mainly come from completed projects, not from new starts.

Overall, new housing construction starts fell to the lowest level in statistical history last year, to 25 million cubic meters. The most difficult situation continues to be in residential construction, while other types of construction are showing signs of recovery.

Housing starts are just beginning to hit rock bottom

New housing starts are expected to be limited to around 15,000 units this year and next. The number has already fallen below 20,000 units in the previous three years, while the long-term need is 31,000–35,000 units per year. The number of completed units has collapsed to the level of the 1950s.

"In the worst case, housing starts could fall even lower. In order to reach even the historically low level of 15,000 homes, it would require a clear increase in owner-occupied housing production, as investor demand is not growing and subsidized housing production will almost halve this year and next," said the chief economist. Jouni Vihmo The construction industry from RT says.

Falling interest rates and inflation, consumer earnings, population growth and migration are currently supporting demand for privately financed housing. On the other hand, unemployment risk, falling housing wealth, concerns about rising interest rates and the availability of financing are dampening home purchase intentions.

"The prices of old homes have continued to fall, and the price gap has widened compared to new homes. Households are extremely cautious and investors' return expectations in the rental market are not being met. Construction costs have remained high and the availability of financing has tightened significantly. The economic equation for residential construction remains very difficult and does not support supply," Vihmo states.

Clean transition projects increase office and infrastructure construction

Other building construction also continued to decline last year for the fourth year in a row. However, the outlook for commercial construction this year is clearly better than last year.

better. Data centers and other clean transition projects, as well as investments in defense real estate, will drive growth this year and next.

Clean transition projects and energy investments will accordingly increase infrastructure construction. In addition, public investments in security of supply and reduction of repair debt will continue in civil engineering, where growth was 3 percent last year. Growth will slow down this year and next.

Renovation construction returned to slight growth at the end of last year, after declining for as many as nine quarters. Developments in renovation construction have been exceptionally weak throughout the 2020s.

"In such a cyclical situation, the combined effect of several different targeted measures is needed to grow renovations, housing construction and the entire Finnish economy. We have presented political decision-makers with, among other things, a fixed-term investment grant that would kick-start renovation projects in housing companies and other renovation construction," says the CEO of the Finnish Construction Industry Federation (RT). Aleksi Randell.

Construction cuts tax revenue

The current cyclical situation in construction is slowing economic and employment growth and increasing the public deficit. Before Russia's invasion of Ukraine, the construction industry's direct turnover was almost 47 billion euros, of which more than 40 percent was paid in taxes or tax-like payments. Turnover has already decreased by 6,5 billion, which means a gap of approximately 2,5 billion euros in tax revenues.

"Now, with the war in Iran increasing uncertainty even further, the government is expected to make decisions to strengthen consumer confidence and the domestic market. It is difficult to believe that private consumption will grow quickly if the housing market, new housing and renovation construction are not activated. Investments in construction pay for themselves, and in this situation, we can no longer afford to wait and see," Randell emphasizes.

The construction industry forecast does not take into account the possible prolongation and expansion of the Iran war. In that case, the risk of rising costs and interest rates would be real, which would be reflected in all construction.