Germany: the housing market in the context of the election campaign – what can be done about rising prices and rents

Property prices are out of reach and rents unaffordable. Has the situation in the German housing market really become as bad as it is often depicted? It is a fact that prices in the housing market are rising sharply. In Q2, they rose by as much as 1.9 per cent against the previous period. Prior to that, they were rising slightly slower, as a result of which the annual price increase, which currently stands at 5.3 per cent, is a good one percentage point lower than in 2016. In contrast, prices in the seven biggest German cities are rising almost twice as fast. Rents in these cities are also going up noticeably at around five per cent p.a. However, we often forget that home owners in areas which are becoming depopulated are lucky if they can find a buyer at all or even suitable tenants.

The fact that housing in structurally weaker regions is cheap is no help at all to city dwellers who are being hit by high prices and rents. Because housing is a major concern for many people, it has become an issue in the election campaign. Concepts being put forward are mostly „more of the same“: the SPD, Greens and the Left want to create affordable accommodation by building social housing and slow down the increase in rents with a more stringent rent brake. In contrast, the CDU/CSU and FDP want to encourage the construction of rental housing through extended write-off options. The SPD and CDU/CSU want to help families buy their own home with subsidies. The latter, like the FDP, also want to introduce exemptions from land transfer tax in order to ensure that high associated costs do not put buying a home out of reach for households.

The question is, however, whether these measures could bring about a lasting improvement in the situation in the housing market. Doubts are justified since the core problem will not be resolved. The escalation in the situation in the housing market in large cities and university towns reflects strong migration to these cities and the fact that there has been too little new building over many years. The trend has led to many regional housing markets drying up completely. This tight supply together with high demand for housing and the improved economic conditions of many households is pushing up rents. In addition, purchase prices are rising as a result of low mortgage interest rates. In contrast, urgently needed housing construction is just not really getting off the ground, firstly because of a lack of building land and secondly because capacity in the construction industry is already very stretched.

Even after the election, there will still be a shortage of building land. If anything, the parties are more likely to put voters off than win them over with this highly thorny issue. After all, when land is designed for building purposes, there is often widespread opposition from nearby residents or environmental protesters, worried about the character of their local area, school or day-care places, and roads with already heavy traffic and about an environment that is worth living in. There is, however, no shortage of money for new building. After all, many investors are desperate for investment opportunities and therefore demand for property is correspondingly high. The various political parties‘ ideas are merely adding fuel to the fire. Tax breaks, subsidies for homebuyers and funds for social housing will only push up demand for land, residential property and building services along with prices even more.

In addition, the parties‘ proposals are associated with further risks and implications: over time, fewer and fewer people living in social housing are needy; according to estimates, around half those in social housing should not be in social housing. Measures to regulate the market such as the rent „brake“ which has so far proved ineffectual do not solve the problem of a lack of housing – on the contrary. They scare investors off. However, measures to help homebuyers are also misplaced. Where housing is in short supply, subsidies are quickly added to the purchase price. Elsewhere, subsidies can lead potential buyers to take on bigger mortgages than they can really afford, while developers with ample funding do not need subsidies.

All in all, whatever the outcome of the election, it will not lead to any improvement in the housing market. Firstly, solutions for more housing construction such as releasing more building land, simplifying building regulations or the qualifications needed by construction workers are more long term, especially since such measures are more the responsibility of Germany’s Laender and local authorities. Secondly, the shortage of housing which has been accumulated over the years cannot be resolved in a hurry. Hopes of a rapid end to rising prices and rents in conurbations are therefore likely to be disappointed. If the parties are able to realise their concepts, it is more likely that they would lead to market distortions or cause negative effects for tax payers instead of affordable housing. On the other hand, the pace of increase in rents and prices is likely to ease off gradually: fewer households can afford the prices or rents because of the level already reached. In addition, construction has picked up and is gradually leading to a rise in new supply. Moreover, higher inflation means that real incomes are increasing more slowly. On balance, it is fair to assume that although house prices will rise further, it will be at a slightly slower pace. The risk of a bubble will also increase more slowly, and consequently, the financial regulator will not have to step on its newly created credit brake.

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