Cyclical patterns of residential construction

The large and frequent swings of residential construction investment have an important bearing on the business cycle. This chapter surveys the cyclical pattern of residential construction investment in the euro area and selected Member States over almost five decades. It uses a standard econometric framework to identify main drivers of residential construction in the short- and longer term. In the long run, residential construction investment is mostly driven by real per capita disposable income developments, and in some Member States also by demographic developments. In the short run residential construction activity responds positively to increasing house prices as well as falling unemployment. Following the housing boom and bust a decade ago, residential investment has bottomed out around 2015 and is now swiftly catching up with disposable incomes. Positive labourmarket developments and increasing house prices should continue to underpin residential construction activity in the near term. This picture is confirmed by additional indicators of near-term developments in residential construction such as building permits and confidence in the construction sector. This suggests a positive contribution of expanding residential construction to GDP growth this year. However, residential construction growth may have peaked in some Member States where the residential construction cycle is already more advanced.