German housing market: Will housing become cheaper thanks to the Grand Coalition’s plans?

Along the stony path to a continuation of a Grand Coalition headed by Chancellor Merkel, following the end of the coalition negotiations the last hurdle to be taken will be the approval of the Social Democrats’ rank and file. Should the majority of members vote “yes”, then, judging by the results of the negotiations between the CDU, CSU and SPD published to date, we can gauge many of the undertakings the new Grand Coalition will try to realise. They include intervention in the housing market. The plans in this regard have met with approval: While GdW, the umbrella association for the housing industry, looks forward above all to the billions that will flow in subsidies, the German tenants’ association Deutscher Mieterbund looks favourably on the tougher regulations for rental apartments. However, will this suffice to combat the growing housing shortage in many large cities and also the rocketing rents and house prices?

Probably not, as key instruments of the negotiated package, such as social welfare housing, special write-downs, or a cap on rental prices have in the past tended to function poorly. As regards social welfare housing, the Federal government will remain committed over and beyond the deadline of 2019 set hitherto for its withdrawal from this segment and is considering injecting at least EUR 2 billion into subsidised housing. However, only the very fortunate few will then enjoy a favourably priced new-build home. The vast majority of households who can hardly afford the high rents in conurbations today will not benefit at all. Experience shows that after a time, the “wrong people” live in many social welfare apartments, meaning the tool’s effectiveness dwindles further. The government also plans special write-downs to make rents affordable. It is doubtful whether this will work. In the past, write-down programmes in the property market have tended instead to spawn expensive erroneous investments. Given the current dearth of investment objects investors face, it is certainly not money that is lacking in the property market. Moreover, the rent price cap introduced in recent years has also hardly had any impact to date. Simply making it obligatory to disclose what the prior rent was will hardly change things, as this does not alter the skewed relationship between the high demand for housing and scarce supply.

Other parts of the list of measures agreed are also not all that convincing. They include the reduction in the proportion of modernisation costs that can be passed on to tenants from 11 to 8 percent. While this may lead to lower rent increases, it also harbours the risk that landlords will more often simply not bother to modernise. Yet it is important that they do with a view to energy consumption levels and climate protection. The idea of construction child benefits of EUR 1,200 per child per year for 10 years for families buying a home may also malfunction. The additional financial scope it offers families is likely to be factored into prices pretty swiftly and therefore simply drive prices on the housing market higher. Not to forget buyers opting to bag the windfalls.

Overall, the subsidies provided will simply serve to fan the fires in the race for scarce resources, namely housing and building plots, and will thus further stoke the pace of price rises. Additional regulatory intervention, by contrast, simply serves to make letting property essentially less appealing. Relief to the housing market will only be offered by measures that ensure there is more land for building, simpler building regulations and approvals processes, and lower costs, for example by easing property transfer tax.

 

 

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