BERLIN/FRANKFURT (dpa-AFX) - Federal Construction Minister Klara Geywitz wants to use tax incentives to boost the struggling residential construction sector. "In view of the dramatic slump in building permits and the associated decline in construction investment this year, the construction and real estate industries urgently need new investment incentives," the SPD politician said Wednesday. She wants to significantly expand tax depreciation options for new buildings.

Housing construction, which has boomed for years, has stalled due to the sharp rise in interest rates on loans and more expensive materials, putting a strain on the construction industry. The German government missed its 2022 target of 400,000 new homes a year with just over 295,000 completions - making the fight against housing shortages and high rents more difficult. Building permits, which are an indicator of construction, have also slumped. The private real estate lending business has been in the doldrums for months. The first half of the year was the weakest in almost 20 years.

Geywitz is now proposing the introduction of a temporary "degressive AfA" for new residential buildings from January 2024. AfA stands for "Absetzung für Abnutzung" (deduction for wear and tear). This is to apply until the end of 2030, thus creating an incentive to implement building projects quickly. A declining-balance depreciation allows higher depreciation for building owners in the near future: In the year of completion and in each of the following three years, seven percent of the construction costs are to be depreciated. At the moment, according to the Central Real Estate Committee (ZIA), the rate is generally three percent. In the following four years, it should be five percent, according to Geywitz's paper, and two percent in the 26 years after that.

"The temporary, declining balance depreciation would be an important contribution to stabilizing the construction industry and thus creating more affordable housing in Germany," Geywitz said. "If the German economy wants to get back on track for growth, it can only do so with a strong construction sector."

Degressive AfA also better reflects reality, she added. Technology installed in new buildings is often overhauled within a few years, he said. "As a result, buildings lose value more quickly at the beginning because they lose their status as state-of-the-art buildings relatively quickly."

Approval from the industry

Approval came from the real estate industry. "This push could bring exactly the impetus that will revive the depressed residential construction sector," said ZIA President Andreas Mattner. Felix Pakleppa, chief executive of the ZDB construction association, welcomed the move but called for further aid such as a suspension of the land transfer tax.

Geywitz sees the proposals as part of the planned Growth Opportunities Act by Finance Minister Christian Lindner (FDP), who wants to ease the burden on the economy by around 6.5 billion euros a year with a tax package. Geywitz said she supports the minister's proposal. "However, there is a loophole." The draft has not yet been agreed upon by the government. If Geywitz's proposal were implemented, it would initially mean tax revenue shortfalls probably in the billions.

The FDP reacted cautiously. "Minister Geywitz must come to an agreement with the cabinet and Finance Minister Lindner on the financing," said Daniel Fost, the construction policy spokesman for the parliamentary group in the Bundestag. Affordable housing is the social issue of the day. "This is not just the responsibility of the finance minister."

A spokesman for the Ministry of Finance said that provisions had been made in the financial planning for the measures described in the draft Growth Opportunity Act. Counterpart funding would be needed for other measures.

The pressure on politicians to respond in the fight against housing shortages and high rents is great. Real estate and construction associations expect around 245,000 new homes to be built this year. The Ifo Institute expects a steady decline to 200,000 completions in 2025.

"Golden age" of construction financing over

Increased interest rates and construction costs are also reflected in demand for private construction loans, which has slumped after booming into the spring of 2022. In the first six months of this year, new business of German banks with private households and self-employed persons shrank by almost 50 percent compared to the same period last year, shows an evaluation of the analysis firm Barkow Consulting. This is the worst half-year performance since 2005, said managing director Peter Barkow.

There was hardly any recovery in June either. With a volume of 14 billion euros, new business was around 39 percent lower than a year earlier. Barkow does not believe there will be a swift recovery. Consumers would probably first have to get used to the higher interest rates, which at least stabilized recently. "The golden age of construction financing is not likely to return anytime soon."

Some optimism was spread by consulting firm EY-Parthenon. Construction prices, which had risen between 16 and 18 percent in 2022 depending on the sector, were likely to align with general inflation. Construction materials would remain expensive, to be sure. But rapidly rising prices for construction services could no longer be enforced, said partner Bjorn Reineke. EY-Parthenon is also cautiously optimistic about residential construction. The consultants expect the decline to slowly turn into growth from 2024 onward./als/DP/ngu