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GMK Center: The Collapse of Housing Construction and Its Impact on the German Economy

Article published: 14 November 2023

IB Economics Syllabus: Microeconomics (demand-supply, government intervention)

Germany’s housing construction sector is facing a downturn, impacting the economy significantly. The government’s measures to streamline construction processes are seen as insufficient by industry experts. Challenges include a 40% increase in raw material costs post-pandemic, higher interest rates, and a decline in new orders. This has led to a 10% year-on-year drop in house prices and a notable decrease in building permits. The sector, crucial for over 5% of Germany’s GDP, is experiencing its highest rate of project cancellations since 1991, highlighting the urgent need for effective government intervention.

IB Economics (IA) Commentary Suggestions:

In your IA, you could analyze how the collapse in housing construction represents a case of market failure. Discuss factors like supply constraints, cost increases, or demand shifts, and how these contribute to inefficiencies in the housing market. Utilize diagrams such as the Supply and Demand model to illustrate changes in the housing market equilibrium. Consider the role of government intervention, such as regulatory policies or subsidies, in addressing these market failures. This analysis allows you to explore the balance between market forces and government actions in correcting market inefficiencies. The key economic concepts to focus on is intervention.

Source of article: GMK Center

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