Spooked Construction market

Despite Market Uncertainties, Optimism Persists: The Future of Wood in a Turbulent Economic Climate

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Our colleagues hear it more and more, there's unrest in the construction and housing market. But what is actually meant by this? Often, it's a matter of people repeating each other and if we're not careful, through our own actions, it becomes a selffulfilling prophecy. But this is somewhat more complex.

Inflation is not our friend

You read it everywhere, inflation this, inflation that. We even have a new word 'Grabflation'. What it comes down to, is that the prices for everything and everyone (in Europe) have increased. At first, this was only with a few products (read, energy and groceries), but it's already spreading to all products and services.

Why? Because if your groceries (raw materials for companies) and your energy become more expensive, you as a consumer need more money. And in a tight labour market, employees can demand more. Employers will largely pass this on to their customers, who now also see their other costs rising. And so we end up in a downward spiral. The central banks are taking drastic action with the interest rate, and we are noticing it...

Inflation trend line The Netherlands

Interest rate

So due to inflation, among other things, interest rates are rising. And not just a little bit, the interest rate has risen from -0.5% to +3.25% in about one year. And even though this is not a historical high, it is clearly noticeable in combination with the higher prices. This increase is necessary, because otherwise inflation cannot be controlled (although opinions are divided on this). At the end of the day, this higher interest rate has a negative effect on the amount that companies can borrow to invest in their growth. But perhaps more importantly in our sector, the high interest rate affects the size of the mortgage that consumers can get. And that, affects the purchase of new homes which are therefore not being built.

War and Energy

If you happened to have been on holiday for more than a year to a place where there is no internet, etc., you are forgiven for not knowing that there is a war in (the outer region of) Europe. Russia has invaded Ukraine and there is still a lot of fighting going on. And you guessed it, this has a direct impact on commodity prices such as gas, and more importantly for our sector, wood from Russia (due to rightful sanctions against the country's government). That inflation we just talked about, was already present in the background, but it got a serious push in the back by this war. A major disadvantage (after the huge loss and human suffering), is the uncertainty that a war brings. And we notice that again in the market. We hope that this act of desperation will soon come to an end, as everyone would really benefit from that.

“The situation remains uncertain, but in any case we expect that there will be a strong dip in 2024" writes the Dutch minister De Jonge

New Construction

Now back in our own little country, where our brave minister De Jonge has big ambitions. We cannot deny that they are ambitious, but whether they are realistic is another matter. At least we hope they are. But something strange is going on here. The construction of new homes is actually decreasing, according to some reports. Here too, a number of obstacles appear to be intertwined. Construction sites and permits remain a thorny issue, but work is being done on it (they say). Regulations are increasing, because houses/buildings must comply with very strict rules (which is perfectly fine, of course, see earthquake in Turkey earlier this year), but this drives prices up. And construction companies will only start building when more than 70% of the homes in the project have been signed up for. Guess who can't get mortgages due to the higher interest rates... Yes, exactly, home buyers. So here too, the circle is complete.

Production and Construction

So why is this relevant to us in the wood sector. Simple. Wood is not only a beautiful natural product, but also a raw material for construction. Less construction means that less raw materials are needed. Less demand for wood means that prices will fall. Oh wait, they are falling, but less sharply than expected. This is due to constraints on the supply side, such as German sawmills having had a lot of trouble with a beetle plague (which they are now getting over), Scandinavian sawmills shutting down temporarily because of high energy prices, and Russia as a supplier of softwood dropping out. According to NOS (a Dutch TV news channel), the construction industry could hit a deep low in 2024, but we are confident that there are also plenty of bright spots that we in the timber trade can hold on to. Think of the increase of timber in construction as a default construction method. Think of investments in sustainability and think of more economical construction methods possible with wood. Moreover, technology does not stand still and there is a lot of innovation, making wood increasingly popular.

What will become clearer in the coming period is that there is still a lot of room for improvement in the timber industry on many fronts, from more efficient production to the digitization of the entire commercial channel.

Despite all the fuss, we are optimistic about the future. And one thing is certain. Wood has a lot of advantages, so if there's a raw material that's future-proof, it's wood.

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