Hausat? Germany’s housing shortage
by Lysia Leal Oliveira
In September 2021, a referendum was held in Berlin, in which voters could have their say on the expropriation of large property corporations. That is to say that the referendum was used to decide whether private development and real estate companies with a portfolio of 3,000 properties or more should have some of their stock “de-privatised” and brought into public ownership. Over 56% of voters were in favour of expropriation. The primary target has been the private housing company, Deutsche Wohnen (German Living), which is the largest landlord in Berlin with approximately 110,000 flats.
The majority of households in Germany are rented. In Berlin, rented flats constitute 84% of the housing stock, and in no other EU country does such a small share of the population live in their own “owned” home. As a result, the shortage of affordable housing in the seven largest metropolitan areas such as Berlin, Munich, and Stuttgart is a hot topic for the Bundestag federal election.
On one side of the political landscape the call was for building more social housing and increasing regulation, to keep speculators out of the housing market. Economists, politicians, tenant protectors, renters’ initiatives and the real estate industry largely agree on this point. The proposed solutions, however, differ diametrically, from rent brakes, rent freezes, rent caps, and rent reductions. Some called for better public transport so that people living in peripheral areas wouldn’t need to move to properties in central locations. Others called for better investment, simpler building regulations, faster approvals procedures, and digitized building permits.
The most common rule of thumb to determine how much someone can afford to spend on housing is that it doesn’t exceed 30% of their gross monthly income. For renters, that includes rent and utility costs. Out of concern for their own income, many landlords also do not accept tenants for whom the rent consumes more. In Germany, households on average spend 20% of their gross adjusted disposable income on housing, in line with the OECD average.
Since 2011, prices for housing in Berlin have been rising in all categories, both rental and ownership as well as existing and new construction. Between 2006 and 2020, the average rental price for housing in Berlin almost doubled, from €5.53/m2 to over €10.55/m2. “The fairy tale of “exploding rents” spread about the Berlin hotspot is false”, adds Maren Kern, board member at the Association of Berlin-Brandenburg Housing Companies (BBU). “There have been percentage increases, but starting from a low level, unique in Europe for a city of this size.” Parallel to this the living space per inhabitant in Berlin rose continually in the last 30 years, from 33,8m² in 1991 to 39,8 m² In 2021. The German average rose in the same period from 34.9m² to 47.7m². Aside from the downsides, is this not a positive?
What is forcing up prices?
Activists accuse the real estate companies of using business practices to increase rents, such as “senseless” renovations, while neglecting necessary repairs and maintenance or passing them on to tenants as expensive renovations. The slogan goes: “We Berliners pay your profits with our rent.”
It is becoming a mainstream belief that eliminating profit would therefore make rents more affordable, especially for people on lower incomes. The excessive profit argument raises the question of whether rents should be based on historical costs, or whether they should be based on the value of the housing services currently provided. One ideological response to this question is that no amount of rent paid to a private profit-oriented landlord would be fair and this bolsters the argument that rented housing should become public or non-profit property. Most advocates of this view are not interested in whether a private company, regulated or not, can provide housing more efficiently than the public sector; if it is considered morally wrong to profit from the needs of others, arguments about efficiency are irrelevant.
In the German Democratic Republic (GDR 1949-1990) rents were frozen at the 1936 level, consuming on average 3% of household income, the allocation of flats was made by a state commission. When the GDR collapsed in 1989, 65% of all flats in East Germany and Berlin – including the 3.2 million post-war buildings – were still heated with coal stoves. 24% had no toilet and 18% no bathroom (not unlike the situation in London 40 years previously). Lifts, balconies, and modern kitchens were even less common.
Forty percent of the apartment buildings were considered severely damaged, 11% even completely uninhabitable. Unable to remedy this condition with its own funds, the legislature decided on hefty tax benefits for investors to renovate the dilapidated flats on the territory of the former GDR and build new ones.
According to the IBB Housing Market Report, in 2021 fewer new flats were completed than in the previous year. This is due to the decline in building applications since 2017 and the corresponding building permits issued. In 2021, there were 8.5% fewer permits than in the previous year. The report points to the restraint of investors due to sharp interest rate rises as one of the reasons as well as a shortage of skilled construction workers. As a result, construction has become even more expensive. By May 2022, new construction prices for residential buildings had already risen by more than 17% compared to the same quarter of the previous year, the highest price increase ever reported. The report concluded that the demand gap for housing that has accumulated over the years cannot be closed in the short term, even on the supply side.
Other studies point to an even bleaker scenario. “Many real estate investors are turning away from Berlin because they were unsettled by a “rent cap” that forced landlords to lower contractually agreed rents and did not allow rent increases. Although the Federal Constitutional Court overturned this rent cap law as unconstitutional, the uncertainty remained. The campaign for expropriation added to the uncertainty. Indeed, international investors are already withdrawing from Germany. For the fifth year in a row, their exposure decreased, falling to its lowest level since 2013, as a study by the auditing and consulting firm EY recently showed. And a study by the Institute of the German Economy (IW) found that, in 2022, US$132 billion direct investment flowed out of Germany that came in. This is the highest outflow among 46 countries surveyed.
As Dr Rainer Zitelmann recently wrote for Focus-online: “In the past, Germany’s main advantages were well-trained skilled workers, a good infrastructure, and a high level of legal security. None of that has remained: More skilled workers emigrate from Germany than immigrate. Of all OECD countries, Germany has the third highest emigration rate. 75% of emigrants have a university degree.” He adds: “Electricity prices are higher than in almost any other country because of the ideological energy policy… If investors now also have to fear nationalization, this would mean the definitive end of any legal security and thus the end for Germany as an investment location.”
Germany applies various instruments, subsidies, and partnerships, including price control and anti-speculation instruments, to keep rents low in the housing market. The pressure on the rental market in Berlin is not “despite the fact that the city is one of the most regulated rental markets, but precisely because of it.” Housing Market regulation has taken on a strong appeal and contributes to the polarization of “poor tenants against greedy landlords”. But who profits from this polarization?
Counter-intuitively, attempting to prevent the increase in housing rents has a negative effect on the supply of affordable housing in certain cases. The lock-in effect occurs because existing rents usually rise less than new rentals in price-controlled areas. Even though people’s need for space changes over their lifetime, it is not worthwhile for tenants with an old contract to move to a smaller flat, because the new rent is higher than the current rent even for a smaller flat. As a result, due to high rents and scarce housing supply, many people stay in their flat – even if it has long ceased to meet their needs. Conversely, young families, young professionals and immigrants who need more space are unable to find suitable flats because they are blocked. The number of people moving has been falling in large cities throughout Germany for years. A home swap market is now becoming organized to try to deal with this mess. According to an article in Business Inside from April 2022, in Berlin the six state-owned housing associations have started a joint swap exchange – swapping your home for another – preferably downsizing so that a growing family can be accommodated. It’s cheaper to eke out new potential from existing stock than to build new. Since 2018, 329 flats have been successfully swapped. The number of requests was 157,000.
From a statistical perspective, there are more housing vacancies in Germany than housing shortages. The vacancies are mainly in regions with declining or stagnating populations – not in large cities and university towns. This regional imbalance is likely to increase in the future. Vacancies are an important indicator of the fluctuation in the housing market and can pose a challenge either when there are too many vacant flats or when there are too few. In Berlin vacancies remain significantly below the “fluctuation reserve.” In the urban centres, apartments, day-care centres, and schools have to be built, in other regions homes are falling into decay and day-care centres and schools are being closed. In economic terms, this is an enormous waste of functioning infrastructure.
An aggressive supply policy on the part of the state, which leads to a more attractive housing offer and lower rents in the urban hotspots, can increase internal migration and thus the depopulation of other regions. It is clearly questionable whether (and which use of) federal and state funds in favour of the urban centres is justified. Studies of rent control in the United States, England and France have found rent-controlled housing to be likely to deteriorate far more often than non-rent-controlled housing.
“It sounds charming, of course, if you could get another 240,000 flats into the state-owned stock by socializing them,” says urban development and building senator, Christian Gaebler. “The other side is: What does that actually cost? What financial risks does the state of Berlin and thus the taxpayer take on?”
He doubts that socialization can put the brakes on the significant rent increases of recent years: “There is no longer a real rental market because the supply is far too low, and demand is growing. This increases the price and the pressure on tenants… Socialization of large stocks does not cancel out this market mechanism.”
Expropriation as a housing policy instrument is controversial mainly because the state would have to financially compensate the companies, and thereby spend money on housing without increasing the number of available units. Rolf Buch, CEO of real estate group, Vonovia called for alternative solutions: “Expropriations do not solve the many challenges on the Berlin housing market… Even after the referendum politicians can work out more constructive solutions that address the concerns of many people that they will no longer be able to afford their flats.”
From a strictly pragmatic approach, consequences matter more than intentions, but in reality, and in political debate, economic policies need to be considered both in terms of the incentives they create and the hopes they raise.
Lysia Leal Oliveira