Construction is one of the most business-cycle-sensitive industries in the economy. And the most fluctuating segment within construction is new residential construction. The financial crisis was an extreme example of this with GDP falling 1.4% from 2007 to 2010 for the EC-19, whereas total construction output fell 20.3% and new residential output fell 48.7%. However, we saw the same pattern from 2022 to 2024 with the negative supply shock, when new residential output fell by 17.2% and total construction output by 2.5% while GDP kept a meagre total growth of 1.4% during the two years.
Thus, new residential construction tells us a lot about the economy as a whole in the country in question. Economic growth and optimism are typically correlated with more residential buildings being constructed. These statements apply to all countries. All of this is well known to anyone working within construction economics.
Consequently, economists have a tendency to focus on the short-term macroeconomic drivers when analysing the activity within new residential construction. We are not wrong in doing so. Interest rates, house price fluctuations, and construction costs are among the most important determinants of new residential building starts. And when trying to forecast these parameters we look into inflation, monetary policy, wage growth, unemployment, private savings, fiscal policy, oil prices and other critical economic factors.
However, this may lead some to disregard the structural drivers behind a country’s level of new residential construction. Specifically, we are talking about population growth.
Intuitively, population growth would lead to an increased demand for housing. Actually, it is hard to find a more intuitive parameter for increased housing needs. Figure 1 confirms the relationship between population growth and new residential construction in a simple way. About two-thirds of the differences between countries in production value per capita in 2026 can be attributed to differences in population growth from 2022 to 2025. (We get a similar result if we use the production value in 2025 instead of the forecast 2026 value).
It is clear that population growth is not the only thing at play. After all, the countries are not placed perfectly on the dotted line in Figure 1.
Still, Figure 1 reveals some interesting things. For instance, it is no coincidence that Czechia has a much higher activity level within new residential construction than the other three Eastern European countries in the EC-19. Here we are witnessing the full effect of having population growth instead of a declining population. Compared to Hungary, the level per capita is 2½ times as big in Czechia. Likewise, it is remarkable that the two major and neighbouring countries, France and Spain, have had very different population growth rates and that this clearly translates into production levels in the new residential segment: Spain is 140% higher than France in per capita production level in the new residential segment in 2026. Thus, the differences between countries are substantial, and they are typically more important for the production levels than any short-term business-cycle fluctuations.
One could ask why we – as forecasters – are not focusing more on population growth.
At least a part of the answer is exactly the structural nature of this parameter. We rarely see a sudden shift in the population development. The birth and death rates do not have large impacts on the year-to-year population changes, and even the net migration of labour shows a remarkable stability in the short term. Thus, the population development is central to understanding the trend in housing demand and housing prices, and thus the level of residential construction in the given country, but it tells us little about the changes in construction activity from one year to another. And the latter is what concerns most of the stakeholders involved in the construction industry such as construction entrepreneurs, building material suppliers, and financial institutions: Will demand for our products in this market increase or decrease, at what speed, and for how long will this tendency last?
Another part of the answer to why we are not focusing more on population growth has to do with the nature of changes. When we do experience a sudden change, it is typically unforeseen as a kind of shock. An example is when a war creates an inflow of immigrants. When something cannot be foreseen and quantified, then we cannot include it in the econometric forecast models. At least not until the incident has occurred. Then, we can take it into account.
Returning to the focus of this briefing, no construction stakeholder should ignore the effect on production value from population growth. The implications of this finding are many and varied for the construction industry. Obviously, the market level depends on people having babies and on life expectancy. Thus, family-oriented policies and health policies co-determine the construction level in different countries.
"Migration and family policy are housing policy: slower population growth means fewer homes needed."
Strict labour market policies keeping people out of the country or even discouraging foreign workers from staying will reduce the structural need for new housing. It may also limit the supply of construction workers, having a negative supply effect on the construction industry. The same is true for remigration policies, which catapult construction stakeholders into one of the hottest and most divisive political issues in Europe in the 2020s with a clear incentive to promote population growth. While it is hard to find policies with positive and substantial population effects, it is much easier to identify the policies that can reduce population growth and thereby the need for new residential construction.
