Construction –Achilles’ Heel of the German Economy

The weakness of construction probably
has a great deal more to do with Germany’s weak growth
during that period than supposedly excessive wages
and salaries or the still unreformed labour markets (von
Heusinger 2005).

The weakness of both residential construction and
private non-residential construction (which mostly tracks
residential construction) in the 2000s resulted above all
from the close of the 1990s property boom. Three factors
produced the boom (Deutsche Bundesbank 2002):

Firstly, immigration caused a sharp increase of four million in
the West German population between 1988 and 1993
(growth of 6.5 percent). Of these, 1.5 million
were ethnic Germans (Aussiedler) from Eastern Europe
and the former Soviet Union, one million were internal
migrants from the former East Germany, and 1.5 million
were asylum-seekers. Such strong immigration caused
demand for housing to spike, driving up property prices
and generating strong construction activity.

Also, until the mid-1990s the state
subsidised construction through generous tax breaks
and the expansion of social housing. Additionally, there was
a construction boom in the former East Germany.

Unlike in the former West, the eastern population was actually
shrinking , but major government stimulus
programmes offered tax breaks, financial subsidies and
cheap loans.