German housing market: The Housing Summit will not offer any tangible relief

The headline of the Federal Ministry of the Interior press release “Housing Summit 2018: Historically unique package of measures” creates great expectations. These will hardly be fulfilled by the measures resolved last Friday in the Federal Chancellery given the challenges in the housing market. The fact that prices and rents are soaring can be attributed above all to the insufficient supply of housing and demand remaining high. This will hardly be changed by additional billions, on the one hand, and further thumbscrews for landlords, on the other. The opposite is more the case, as the EUR 5 billion announced for social housing construction through 2021, the EUR 2.7 billion construction child benefits, special amortisation schemes and an upgraded housing construction premium will simply further stoke the demand for land for housing development and construction services. It is not a matter of a lack of money, as the discussion on the property bubble in Germany already shows.

Thanks to low interest rates, investors and private developers have ample financial resources at their fingertips. Nevertheless, not enough housing is being built. This is shown by the ever greater gap between building approvals issued and the actual number of buildings commissioned. Since 2010 the overhang has grown to over 400,000 approved apartments, probably with a significant five-digit figure being added to the number this year. As a result, prices of building land and construction services will rise even faster given that the construction industry is already working at full capacity. The construction of rental apartments only makes financial sense if even higher rents can be charged.

This can also be assumed to be the case as regards the shortfall in apartments in conurbations. To counteract this deficit, the rental price cap (which to date has had little impact) is to be supplemented by a disclosure requirement on the prior rent. At the Housing Summit an agreement was reached that the period covered by the rent index be extended from four to six years, the intention being to additionally dampen the customary local comparable rent as the basis for the rental price cap. Now, should these instruments actually work, then it would not help tenants, either. For example, the number of people seeking apartments in cities could rise still further. Why should people look for cheaper apartments in the suburbs if the rents that can be charged downtown cannot be much higher. Moreover, investors could gradually lose interest in the ever more strongly regulated housing market and turn their attention more to the commercial property market, for example. After all, rents are rising for offices and logistics properties, which are likewise both in short supply.

So what would actually help? The housing supply will remain tight for the time being, and little can be changed in the short term. Instead of pumping more money into the heated property market it would be better to make construction simpler and cheaper. Points to be tackled are, we believe, rendering construction law leaner, making approvals processes faster, and revoking some of the expensive preconditions, such as those for energy efficiency. The Housing Summit resolutions only contain vague announcements in this regard, whereas a more audacious approach would be necessary to effectively optimise the flood of regulations and decrees put in place over the years. A major lever that could be realised in the short term is property transfer tax, where in past years tax rates have been increased sharply, a factor that is additionally leveraged by the now far higher purchase prices. Here, exemptions for first-time buyers could offer tangible relief for buyers. This would above all lead to a noticeably eased situation in cities, where prices are already very high. One glimmer of hope from the summit: Alongside the expensive and hardly efficient social housing construction, the more effective tool of subsidies in the form of housing benefits is also to be expanded. And public plots of land are to be better mobilised for construction projects. However, people interested in buying or renting housing should not get their hopes up that housing is likely to become cheaper in the foreseeable future.

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