According to the OECD, the sharp decline in global demand has not fully passed through to housing construction - residential plus nonresidential plus public - across many economies; and in some cases, it is still elevated by as much as 2%-3% of overall GDP.
This chart (left) shows the difference between the average trough value of construction as a share of GDP and the fourth quarter 2008 value of construction as a share of GDP. New construction as a share of GDP remains elevated compared to the average recession; and furthermore, that construction is expected to fall further.
This is probably not a shock. Construction in the U.K., Italy, France, Ireland, Netherlands, Belgium, Canada, Spain, and Denmark all have a ways to go before hitting their average trough in construction. This is important from an accounting point of view, as slackening construction (part of gross fixed investment) will drag GDP growth.
But some countries are setting records. Construction in Japan, Germany, and the U.S. has fallen below the average recessionary level of construction as a share of GDP. In the fourth quarter 2008, U.S. construction fell 0.6% as a share of GDP since just last year to 7.1%. And German construction - below 6% of GDP - is at a historic low.
This does not mean that the stock of housing - residential plus nonresidential - is expected to grow and contribute to GDP across the U.S., Japan, and Germany; quite the opposite. In the U.S., private nonresidential construction tumbled 4.3% in January, and according to the Architecture Billings Index (ABI), is expected to fall further in coming quarters. On weak economic conditions and a sharp pullback in demand for housing, U.S. new construction is almost 80% off its peak of 2.27 million starts in Jan. 2006. And we all know what happened to U.S. home values, which are 26% off their peak in the fourth quarter of 2008.
And some of these housing markets are feeling the pain as well.
Each market is different, and home values across these markets are not guaranteed to follow the same path as those in the U.S. For example, the slide in Japanese construction is partly due to stricter building codes initiated in 2007.
But something is amiss; for example, Dutch home values fell for the first in 2008 time since 1990 on credit strain. Nevertheless, the OECD study does suggest that generally, growth in the housing stock slows during recessions. And the deeper the recession, the farther will new construction slide.