German construction activity to hit highest level in 20 years

BERLIN, June 1 (Reuters) - A boom in residential building and higher state spending on roads will boost German construction sales by 3.5 percent this year, lifting it to its highest level in nearly 20 years, the HDB construction industry association said on Wednesday.

The booming construction sector has become one of the main growth drivers in Europe’s biggest economy as a slowdown in emerging markets such as China weighs on exports.

In the first three months of 2016, construction investment was one of the biggest contributors to German growth.

“Construction will contribute to a stabilisation of the overall economic upswing which is under pressure from a struggling world economy and slackening exports,” HDB president Thomas Bauer said.

The association expects nominal sales to increase by 3.5 percent to 104.7 billion euros ($116.7 billion) this year, the highest level since 1997. In real terms, revenues are expected to rise by 2.0 percent.

In January, HDB had forecasted nominal sales growth of 3.0 percent.

Nearly 300,000 new homes will be built this year, but this is still not sufficient to meet demand in light of rising numbers of migrants and a growing urban population, Bauer said.

In the medium term, some 400,000 flats need to be built annually to avert housing shortages in cities, he added.

Even before the refugee numbers started to increase last summer, there was an estimated lack of 800,000 affordable flats in urban areas. With demand outstripping supply, property prices and rents have soared in cities like Berlin, Hamburg and Munich.

In addition, record-low borrowing costs have encouraged many Germans to overcome their aversion to buying their own flats and houses, with some also regarding property as an attractive investment.

The government has decided to increase its spending on social housing and introduce special tax incentives for private sector investors who build flats in urban areas. Both measures are expected to give the sector an additional push this year.

$1 = 0.8973 euros Reporting by Michael Nienaber; Editing by Madeline Chambers