One of Scandinavia’s biggest contractors expects the region’s construction industry to undergo a two-year dive as high interest rates weigh on real estate prices across Sweden, Denmark and Norway, with fewer new projects started.

The region’s construction markets will see a production drop of 6% this year and 7% in the next, Veidekke ASA said in a market update. Estimates for long market rates, the labor market and demographic trends indicate that the downturn will bottom out by the end of 2024, the company said on Thursday.

With residential prices having fallen in all three countries, Sweden and Denmark have suffered the biggest declines as central banks hiked rates to quell a surge in inflation. While Norway has been bolstered by its oil and gas industry, builders there are also postponing or canceling new projects.

“Although new residential sales have been very low for the past year, the number of construction starts only started to decline after Christmas, meaning that the drop in production will only start to bite from year-end 2023,” said Kristoffer Eide Hoen, Veidekke’s head of business development and analysis.

The infrastructure sector, which has remained a bright spot due to high government investment, will continue to benefit from large transport projects and increased spending on water supply, sewerage and energy projects. Veidekke expects that an increased focus on defense will intensify competition for budget funds in the next few years, particularly in Sweden and Denmark.