The housing crisis in Germany remains a pressing issue, even as the construction industry shows signs of a potential turnaround. After five years of decline, real construction volume is projected to grow by 2% in 2026. However, a decrease of nearly 4% is expected in 2024, followed by a further decline of just under 1% in 2025. Despite the anticipated recovery, the construction volume will still lag significantly behind the peak levels of 2021, with residential construction remaining particularly affected. According to the German Institute for Economic Research (DIW Berlin), the total construction volume in 2026 is expected to be 7% below 2021 levels, with residential construction down by 10%. New residential construction, in particular, will likely remain 25% below its 2021 volume. Martin Gornig, a DIW researcher, notes that while residential construction appears to have stabilized, the gap between construction demand and output remains alarmingly large, highlighting the deep challenges facing the sector. Residential Construction: The Struggling Pillar of the Industry The German construction industry has faced significant setbacks in recent years due to rising interest rates and escalating construction costs, which have made financing projects increasingly difficult. These factors have led to a sharp drop in orders and permits, with nominal construction volume falling in 2024 for the first time since the financial crisis. In real terms, declines have been ongoing since 2021, with residential construction hit the hardest. Many households have been deterred from building homes due to prohibitive costs or an inability to afford projects altogether. The commercial construction sector has also faced challenges, with economic weakness slowing the development of factories and office buildings. Civil engineering infrastructure projects, however, have been a rare bright spot, helping to stabilize construction volume. Study author Laura Pagenhardt explains that “many households were deterred from construction projects by the high costs or simply could no longer afford them,” underscoring the significant impact of rising financial pressures on the sector. 2025: Stabilization but No Immediate Recovery While the situation is expected to stabilize in 2025, an economic rebound is unlikely in the short term. Although interest rates have recently fallen slightly, broader economic concerns—such as uncertainties in the labor market and stagnant income growth—are likely to keep household spending cautious, particularly in the first half of the year. Civil engineering is expected to continue growing at a steady rate, but residential construction will only begin to recover in 2026. A Call for Immediate Action on Social Housing While some political measures, such as increased depreciation for investments in new residential construction, have shown early signs of success, they fall short of addressing the acute housing shortage. Efforts to limit construction cost increases and streamline administrative procedures have also been initiated, but they are insufficient to resolve the current crisis. “The measures taken so far are necessary but not enough to overcome the acute housing crisis,” argues Gornig. To bridge the gap, the study advocates for an immediate action program for social housing construction. This initiative would focus on providing additional federal funding to municipalities facing severe housing shortages and creating a legal framework for accelerated implementation of social housing projects. Such measures, the authors argue, are essential to tackling the deep-rooted challenges of the German housing crisis and aligning construction output with the growing demand for affordable housing. Without swift and targeted action, the gap between housing needs and construction output is likely to persist, prolonging the strain on the housing market.