Renovation rates in Germany collapse amid spiralling costs

High interest rates and a surge in material costs have seen Germany’s pace of construction falter, prompting industry concerns at a time when talks on EU renovation initiatives are stalling.

Deep renovation, which significantly reduces energy consumption for heating and cooling, is seen as crucial to meeting climate targets and reducing the strain on energy systems.

The EU aims to address this by boosting renovation rates to 2% of the housing stock, an objective enshrined in the ongoing reform of the EU’s Energy Performance of Buildings Directive.

In Germany, these renovation efforts are at risk because of a surge in construction costs and recent interest rate increases. New construction rates are down 30% compared to last year.

Renovation rates are slumping, too. “We are deeply concerned about the current slump in building renovation rates,” warns a letter sent by an alliance of 15 associations, including the WWF and the industrial energy efficiency initiative Deneff.

“Orders for energy modernisation measures, both for building envelopes and technology, have declined massively or even come to a standstill,” adds the alliance, which features producers of renovation materials like mineral wool.

The spike in construction costs is spilling over into renovation, too. The cost of insulation works was up 12.7% in May compared to the previous year. Upkeep costs were up 11.7%.

This adds to a continued trend that saw construction costs increase rapidly since trade restrictions were imposed during the COVID-19 pandemic in 2020. Yet, while initial periods of high demand were buoyed by the low interest rate environment, construction and renovation rates are now coming under double pressure.

Climate gap widens

Germany’s buildings are among the country’s largest roadblocks on the path towards climate neutrality by 2045.

Aside from large-scale installation of heat pumps, renovations are deemed crucial to achieving the sector’s target to slash emissions down to below 70 million tonnes of CO2 from 2022’s 115 million – a daunting task given the short amount of time available.

A 2021 report found that Germany’s renovation rate sat just below 1%, far from the more than 2% that calculations for an optimal energy transition demand.

State support for building renovation and more efficient buildings was initially expected to deliver a cumulative 40 million tonnes of CO2 savings, ensuring that the German building sector stayed on track by a hair’s breadth.

A recent multi-year delay on a traditional heater ban initially envisioned for 2024 has re-opened that gap. The slowdown in renovation threatens to add to that.

“The climate targets are in danger of being missed even more than already foreseeable,” the alliance letter stated, adding that building sector energy demand needed to be addressed to make the German energy transition successful.

Last summer, Berlin slashed renovation funding to channel the funds into heater replacement support. The NGO Environmental Action Germany (DUH) called the move “sheer mockery” at the time, criticising the government for proclaiming climate action while cutting funding.

Call for cash

But aside from the climate, businesses are at risk, too. Amid collapsing construction rates, the sector was placing its hopes on renovations to make up the share of lost business.

Renovations make up 59% of industry turnover in the Euro area, almost €550 billion in 2022. Previously, construction held that spot: 60% of business came from new buildings in 2008.

Eyeing political commitments to boosting renovation, the industry began building up capacities. Mineral wool producers created extra lines, and firms hired and trained specialists to install it.

“There is a threat of waves of redundancies. Capacities built up in reliance on policy will not be maintained in the absence of demand,” the letter warns. One source confirmed that significant parts of the industry are on government-supported short-time work.

In response, the industry is asking for extra money. ”The funding conditions for comprehensive energy modernisation must be restored,” the letter stresses, asking for a 20% support floor for renovation.

Calls for a high-level summit on renovation policy by the industry have thus far gone unheard. Meanwhile, talks on the reform of the EU’s Energy Performance of Buildings Directive, which seeks to make renovations obligatory, have progressed slowly, with the next round of negotiations set for 31 August.

[Edited by Benjamin Fox and Frédéric Simon]

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