Economic Forecast of the Construction Sector March 2018
Economic Forecast of the Construction Sector Page 2/8 Introduction This economic forecast of the construction sector focuses on 2018 and 2019. The Danish economy is in a phase of stable recovery, which has an upwards effect of housing prices. This, in turn, causes a surge in new housing construction as well as repair and maintenance hereof. Accordingly, The Danish Construction Association expect the construction employment to rise to a level of nearly 175.000 employed in 2019. In the civil engineering industry, the decreasing activity is largely due to lower investments in the infrastructure of roads. The forecast in brief The Danish economy is in a phase of stable recovery with a broad based growth in GDP. In 2017, the real GDP growth surpassed 2 % and we expect it will likewise exceed 2 % in 2018. Notably, the growth in GDP has multiple drivers, namely private consumption, exports and investments the latter particularly housing investments. As the economic circumstances improves, the level of employment steadily rises. However, record high employment levels are also the result of labour market reforms, which have expanded the labour workforce. Additionally, Table 1: Supply and demand balance 2017-2019 the labour market is in risk of mismatch issues and shortage of qualified labour. The economy is expanding and thus driving house prices higher.the development in housing prices increases new construction as it becomes more attractive in relation to the existing dwellings as well as increasing home equity, which affects the repair and maintenance market positively. The increase in new dwellings is primarily due to the improvement of the housing market. We expect construction of 27.500 new dwellings in 2017 increasing to 30.000 in 2019. The risk of housing bubble is looming although the consensus is that the market bases itself on the macroeconomic fundamentals. The improvement in the housing market affects the market for repair and maintenance positively and it will continue to do so in the coming years. High levels of public housing renovations stimulated the activity in the previous years, but we expect it to normalize in the forecasting period. We expect that the commercial and private sectors drive the repair and maintenance market in the coming years as the public housing renovation activities normalizes. 2017 2017 2018 E 2019 E bn. kr. Real growth (%) Private consumption 1,007 1.5 2.4 2.4 Government consumption 536 1.1 0.8 0.5 Governemnt investment 75-3.2-1.1 3.5 Housing investment 98 4.8 5.4 4.1 Business investment 261 3.5 6.3 4.8 Exports of goods and services 1,183 4.6 2.9 4.0 Imports of goods and services 1,033 4.1 4.1 5.6 GDP 2,143 2.1 2.1 2.0 Inflation (annual growth in consumer prices) - 1.1% 1.2% 1.5% 10-year government bond yield - 0.5% 0.7% 1.1% Cash price on housing (nominal growth) - 4.3% 3.8% 3.3% Public balance (billion DKK and % of GDP, respectively) 10 0.5% -0.5% -0.2% Current account balance (billion DKK and % of GDP, respectively) 163 8.0% 7.0% 6.0% Gross unemployment (1,000 persons) - 116 112 107 Note: 2017 numbers are from Statistics Denmark. 2018 and 2019 estimates (denoted E) are forecasts by The Danish Construction Association and are based on Economic Survey (Dec. 2017), Danish Economic Council (Feb. 2018) and others. Source: Statistics Denmark, Ministry of Economic Affairs and the Interior, Danish Economic Council, Nordea, The Danish Construction Association
Economic Forecast of the Construction Sector Page 3/8 We expect the civil engineering activity to stagnate at the current level. The major civil engineering projects are entering their final stages. In the long term, we expect that the commencing of the Fehmarn Belt tunnel from 2020 and onwards will increase the activity from the current level. Employment We expect the employment in the construction sector to increase by approximately 5.000 in 2018, adding up to a level of 171.500 employed workers, white collars and master craftsmen in the industry. Table 3 shows the employment divided into main areas. The employment in the construction industry increased by more than 20.000 employees from the bottom in 2013, compared to the current situation. The major driver is the market for new construction, which we expect to increase by 4.500 persons employed towards 2019. The increase in employment in the repair and maintenance industry is more moderate with a rise by 2.300 workers by the end of 2019. Figure 1: Employment in the construction sector 2000-2019 (thousand employed) 190 185 180 175 170 165 160 155 150 145 140 170.8 159.2 189.5 162.7 143.2 144.4 171.5 174.5 166.5 161.7 Employment, total Average 2000-2019 Development in the construction sector The housing market The housing market has been the main driver in the construction industry in the last couple of years. The housing prices in the large cities have risen in the beginning, but the increase in prices has made it more attractive to move out of the cities and thereby increasing the prices in the rest of the country. The price increases is mainly driven by urbanization both from the rural districts to the regional centers and from the regionals cities to the capital and other large cities. It is expected that growth rate in housing prices is in the range of 3-4 % annually which is supported by increase in employment, real income and the continued low interest rate environment although the interest rates are expected to rise slowly in the following years. It is the Danish Construction Associations evaluation that the price development in Copenhagen as well as the larger cities is still based on fundamentals. In general, the main
Economic Forecast of the Construction Sector side 4/8 reason for home ownership is still to live in it and not as a speculative investment, which is supported by the expectation of lower increases in the housing prices in the years to come. There are multiple risks in the housing market among them the widespread financing of homes by flexible interest rates. This is mainly a concern if the interest rates increases more than expected. Another risk is that the housing prices in the larger cities are pushed up by speculative acquisitions, e.g. from individuals who buy project sales for resale. This would be the case where the price movement is based on speculation rather than fundamentals. On the presence of these risks the European Central Bank and the Danish central bank has raised the warning flag about the risk of a future housing bubble in parts of the market especially in Copenhagen. The housing tax agreement from May 2017 contains a permanent tax deduction for the homeowners who purchase homes before 2021. This agreement can induce potential homeowners to accelerate their purchases. This could drive prices higher towards 2021 and it is expected that the effect is larger where the tax deduction is substantial. On the other hand, the decision in the above mentioned agreement, to cease the nominal tax freeze in the property will have a stabilizing effect on the housing market. Residential construction There have been significant increases in housing construction since 2013. We expect 27.500 commenced buildings in 2017 increasing to 29.000 in 2018 and 30.000 in 2019. The progress in the new construction is mainly driven by the increase in house prices especially in the larger cities. This is the reason that multi-dwelling houses are booming in 2017 and continues to be in 2018 and 2019. We expect an increase in both detached and terraced houses as the house prices increase in the rest of the country. In the major cities construction of public housing increases because of the demographical demand caused by urbanization. The municipalities part of the financing is at a level of ten percent that is set to rise to 14 percent in 2019, which is the normal level. This is a probably a major factor in the high level of commenced public housing in 2018. The number of commenced dwellings has been adjusted substantially upwards since the latest forecast from October 2017. The adjustment relates primarily to 2016 and the rest of the forecasting period. The adjustment is caused by a methodical change relating to the data suppliers. We use the new data - although carefully - in presence of the associated uncertainty regarding the underlying trends. Commercial construction The commercial construction is recovering in Denmark. The improved economic conditions helps and the occupation rates are increasing as the number of vacancies are dropping. Commercial construction consists mainly of 1) factories and workshops, 2) administration, commerce and tourism and 3) agriculture. For factories and workshops, we expect an increase in new construction from 0.35 million square meters in 2017 to 0.39 million square meters in 2019. This is based on the increase in production and sales in the industrial sector. The vacancy of warehouse and production facilities also dropped from four per cent to two per cent in the last couple of years. For administration, commerce and warehouses we estimate an increase from 0.83 million square meters in 2017 to 0.93 million square meters in 2019. This is mainly because of the vacancy rate dropped from around ten percent
Economic Forecast of the Construction Sector side 5/8 in 2014 to seven percent in 2018 and the increase in rent on commercial buildings for administration. For agriculture, we expect an increase from 0.82 million square meters in 2017 to 1.1 million square meters in 2019. The main cause is the consolidation in the sector. Risks are credit tightening, increased environmental regulation and increased likelihood of protectionism. Construction of public institutions After the administrative structural reform of regions and municipalities in 2007, resources were prioritized to finance 16 so-called super hospitals in the following years. Some of the hospitals were repairs on existing ones, while others was or are going to be new buildings. This project is culminating at the moment and is a large component of the newly constructed public institutions. The construction of new teaching facilities across the country is an important factor as well. Repair and maintenance The market for repair and maintenance is closely aligned with the development in the housing market. An increasing number of home sales in 2017 will have an effect on the repairs and renovations in 2018 as most of the renovation projects are being carried out, when buying a home. The rising house prices leads to large amounts of equity that the homeowners can use to repair and renovate their houses. The housing prices rises in all regions of the country, which together with low yields has created the large home equity. A majority in the Parliament has made the deduction for energy renovations and services - also known as håndværkerfradraget - permanent in 2018. It is positive, although the effect on undeclared work is smaller in the preexisting focused deduction scheme compared to the former more unlimited deduction scheme. The market for repair and maintenance was stimulated by the large activity in social housing construction in the last couple of years. The activity peaked in 2015 and the activity has had a sharp reduction in 2017 that we estimate to continue towards 2020. The commercial sector is improving as the general economy improves. The number of vacant office buildings is declining and we expect that the increasing scarcity of usable offices will have a positive effect on the repair and maintenance sector. We expect an increase of activity of 2.9 % in 2018 and 3.3 % in 2019 in the market for repair and maintenance. Civil engineering The civil engineering industry was in a severe downturn after the crisis in 2008. In the years after, the activity has been moderately increasing. In the short and medium term, the activity in the industry is declining. We expect that the civil engineering activity rises in the long run when the work on the Fehmarn Belt tunnel is expected to commence around 2020. The civil engineering activity shows a temporary increase in 2018 due to a few large energy infrastructure investments such as offshore windmill farms and transnational power cables. The construction of a new circular Metro line in Copenhagen is in good progress. The drilling part of the City ring is over, and it is expected that the tracks will be finished in the first half of 2018.
Economic Forecast of the Construction Sector Page 6/8 Key figures Table 2: Production value in the construction industry 2009-2019, current prices, billion DKK 2009 2010 2011 2012 2013 2014 2015 2016 2017S 2018E 2019E New construction 50.3 42.1 48.8 46.3 43.0 48.3 49.7 57.3 62.4 66.3 70.4 Housing 17.7 15.2 20.8 17.1 14.4 16.1 21.7 24.9 27.7 29.4 31.2 Commercial 19.3 14.4 14.7 12.8 12.2 13.3 11.3 13.5 14.5 15.4 16.6 Public 13.3 12.4 13.3 16.4 16.4 18.9 16.7 18.9 20.1 21.4 22.7 Minor and major repairs 63.8 61.3 65.3 65.6 67.7 72.7 78.3 80.2 82.2 84.5 87.3 Major rep. of housing 24.9 23.8 28.7 28.6 28.2 32.2 31.5 33.3 34.1 35.1 36.3 Major rep. of commercial 8.9 6.2 5.6 4.9 6.2 7.5 10.0 9.3 9.5 9.8 10.2 Major rep. of public housing 2.6 3.0 2.9 3.2 3.9 3.6 4.5 4.1 4.2 4.3 4.4 Minor repairs 27.4 28.4 28.1 28.8 29.5 29.4 32.2 33.5 34.3 35.2 36.4 Total professional construction activity 114.1 103.5 114.1 111.9 110.6 121.0 128.0 137.5 144.5 150.8 157.7 Civil Engineering 46.2 48.2 50.5 53.9 56.9 54.0 51.9 53.6 54.0 55.3 53.5 New construction 23.6 26.4 29.5 33.0 35.7 33.0 34.6 35.2 35.4 36.9 35.1 Repairs of civil engineering 22.6 21.8 21.0 20.9 21.2 21.0 17.3 18.4 18.7 18.4 18.4 Total professional construction and civil engineering activity 160.3 151.6 164.6 165.8 167.5 175.0 179.8 191.1 198.6 206.0 211.2 DIY and undecleared work 29.0 27.8 29.0 30.6 30.0 28.7 30.1 30.9 31.3 31.7 32.1 Other production (incl. exports) 13.5 11.8 10.5 9.2 7.4 8.3 10.1 11.1 11.3 11.4 11.6 Total construction and civil engineering activity 202.9 191.2 204.1 205.6 204.9 212.0 220.1 233.2 241.1 249.1 254.9 Total consumption of materials 86.9 82.0 86.6 89.2 85.9 88.0 91.5 96.1 98.9 102.0 103.6 Total professional construction and civil engineering activity Total construction and civil engineering activity Fixed 3rd quarter 2017-prices 180.0 166.8 175.5 174.5 176.0 183.0 186.8 194.0 199.4 204.6 207.3 227.1 210.4 216.7 214.2 212.4 218.5 225.9 235.1 240.5 245.7 248.4 Note: E denotes estimates, F denotes the forecast by The Danish Construction Association. Table 3: Employment in the construction industry, 2009-2019 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F New construction 36,100 30,100 33,500 33,000 33,100 33,200 35,600 39,300 42,500 45,000 47,000 Repair and maintenance 58,400 53,900 55,200 54,300 55,000 58,600 59,200 59,900 60,200 61,000 62,500 Civil engineering 19,900 18,000 19,100 19,300 18,100 17,700 19,300 20,500 21,000 21,500 20,000 Other occupation 5,800 4,800 4,400 3,800 4,200 5,000 6,000 7,100 7,200 7,500 8,000 Clearical work 25,400 24,100 23,600 23,300 23,700 24,600 25,500 25,400 26,100 26,500 27,000 Not at work * 13,200 12,300 10,000 10,900 10,200 9,200 9,700 9,400 9,500 10,000 10,000 Total 158,700 143,200 145,900 144,600 144,400 148,400 155,500 161,700 166,500 171,500 174,500 Note: F denotes the forecast by The Danish Construction Association.
Economic Forecast of the Construction Sector side 7/8 Table 4: Number of commenced dwellings, 2008-2019 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017S 2018F 2019F Detached single famliy houses 7,000 3,900 5,000 4,600 3,800 3,900 4,000 4,800 5,500 5,600 5,800 6,000 Terraced, linked or semidetached houses 3,100 1,400 2,700 2,700 2,800 1,800 2,600 3,500 4,600 5,200 5,500 5,700 Multi-dwelling houses 6,900 5,900 8,200 11,400 8,600 5,700 10,500 12,400 15,500 16,700 17,600 18,300 Dwellings total 17,000 11,100 15,900 18,700 15,200 11,400 17,100 20,700 25,600 27,500 29,000 30,000 Note: F denotes the forecast by The Danish Construction Association. Table 5: Commenced construction 2008-2019, million m 2 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Residence all year round 2,700 1,700 2,200 2,340 1,920 1,650 2,040 2,390 2,780 2,890 3,030 3,150 Farm houses 1,920 1,330 1,010 1,190 1,100 1,180 980 910 870 820 900 1,000 Factories and workshops 900 300 300 310 390 290 260 270 320 350 370 390 Office, trade and inventory 1,960 1,160 950 1,010 760 800 810 780 800 830 870 930 Unspecified total 420 250 330 270 340 330 270 280 340 370 390 400 Non-residential total 5,200 3,040 2,590 2,780 2,590 2,600 2,320 2,240 2,330 2,370 2,530 2,720 Culture and institutions 270 410 430 410 460 540 510 470 510 540 570 600 Unspecified buildings 1,170 950 955 850 720 775 710 790 855 1,010 1,070 1,120 Hereof: Vacation homes 310 190 230 185 150 155 155 160 165 170 180 200 Garage, carports and outhouses 700 590 580 520 440 480 440 490 560 700 750 780 Construction total 9,340 6,100 6,175 6,380 5,690 5,565 5,580 5,890 6,475 6,810 7,200 7,590 Note: E denotes the forecast by The Danish Construction Association.
The Danish Construction Association Nørre Voldgade 106 1358 København K Telephone 72 16 00 00 www.danskbyggeri.dk