The Decline in Building Construction Volume Slows Down
In the third quarter, the volume of construction work performed in Estonia decreased by 6% compared to the same period last year. The volume of building construction decreased by 5% year-on-year, with the rate of decline slowing. The volume of infrastructure construction fell by 7% in the third quarter.
Over the nine months of this year, the volume of construction work performed in Estonia has declined by 7% compared to the same period last year. The decrease in construction work has been mainly driven by building construction, whose volume decreased by 10% over the nine months. Infrastructure construction volume fell by 1%. Since building construction accounts for 60% of the share, the impact of this decline on total construction is significant.
The volume of building construction in Estonia has declined since the second quarter of 2022, that is, for ten consecutive quarters, and its volume has fallen to the level of 2017. Infrastructure construction volume has only declined in a few quarters in recent years, and the volume is higher than the 2021 level.
Infrastructure construction supports construction volumes
Building construction is hampered by low demand in the residential real estate market. While signs of improvement can be seen in the apartment secondary market, the number of reservations in Tallinn and its surrounding municipalities' new developments remained low in the third quarter. Compared to the pre-pandemic average (years 2016–2019), there were 60% fewer reservations in new developments. Over the three quarters of this year, the volume of building permits for residential premises was 5% lower than a year ago. The number of building permits issued for residential premises has been in decline since the second half of 2021 and has fallen to the level of 2014–2015 over the nine-month period. Residential premises were approved for use over the nine months of this year by an area approximately a quarter less compared to the same period last year.
Over the nine months of this year, the volume of non-residential buildings approved for use was 17% smaller than a year ago, while building permits were issued 9% more compared to the same period last year. Since the number of building permits for non-residential buildings was in greater decline in 2022, this year it is comparable to the 2018 level.
The larger number of building permits issued for infrastructure this year indicates better prospects for infrastructure construction. State infrastructure investments, including Rail Baltic, are keeping infrastructure construction volumes high.
Construction sector confidence is still weak
Although construction sector confidence does not yet show clear signs of improvement, it has not declined further. The low point of confidence remained in the fall of last year. The affordability of apartments is improving due to declining interest rates and wage growth. At the same time, the high prices of new developments have made them more accessible mainly to higher-income households. Planned tax changes for next year will reduce the purchasing power of the average wage earner, while household confidence in the future remains weak. Interest rates, however, will continue to decline next year and will support both the affordability of apartments and improvement in demand.
Article author: Marianna Rõbinskaja, Swedbank economist
