Free Market Fundamentalist

German Left Has Wrong Ideas for Housing Market

Don’t add regulation to solve problems created by regulation in the first place.

Berlin Germany
View of Berlin, Germany from Alexanderplatz, March 28, 2020 (Unsplash/Stefan Widua)

Housing is one of the top issues in the German election on Sunday. Proposals reveal a traditional left-right divide: the Social Democrats and Greens seek to rein in prices with rent controls; the Christian Democrats and liberal Free Democrats call for more construction, including by relaxing planning laws and other regulatory requirements.

Coinciding with the federal election, a referendum in Berlin will decide whether the city-state expropriates about 200,000 homes.

The proposal is for private landlords owning more than 3,000 properties to be “socialized”. Supporters argue this would lower prices, as the houses would no longer need to be profitable, but this betrays a simplistic understanding of the market. If the government makes it impossible for developers and landlords to turn a profit, they will develop and rent out fewer apartments and the housing shortage will grow, not shrink.

That’s exactly what happened when Berlin froze rents last year: the number of apartments on the market dropped 57 percent. Owners kept their flats empty while the Constitutional Court reviewed the new law. It ruled in April that the freeze was unlawful. Renters had to suddenly pay a year’s worth of missed rent increases.

Now left-wing parties want to try the same nationally.

Rent cap

Specifically, they would cap rents at the local average. This could deter investment.

A similar rule exists in Sweden: rents there must match those of comparable apartments nationwide. This has led to a shortage of rental apartments, because there is no money in building any. The European University Institute has calculated that Swedish rents would need to rise 70 percent to give developers a 5 percent return on their investment.

Housing in Berlin is cheaper than in Hamburg or Munich, and far cheaper than in London or Paris. The city’s relatively low rents, and burgeoning startup scene, attracted expats and Germans from other regions. Before the pandemic, Berlin’s population was growing by 40,000 per year. Rents doubled in a decade.

Since reunification, the city has sold roughly 200,000 apartments, many in the former East Berlin, to private investors. If the referendum is successful, many of those apartments could be returned to public ownership — although, like the rent freeze, such an expropriation may not stand up in court.

Shortages

Deutsche Bank reckons the country as a whole is about one million homes short. Rents have increased 35 percent in the last decade. The average price of a new home has doubled.

Half the population rents. Two-thirds of Germany’s 23 million rental apartments are owned by small landlords. The remaining third are owned by public housing corporations and large investment companies.

The outgoing “grand coalition” of Christian Democrats and Social Democrats maximized rents, increased rental subsidies from €145 to €190 per month for couples and allocated €5 billion to state governments to build 1.5 million homes.

Resistance comes from local governments, which are reluctant to sacrifice green space. Especially for “affordable” housing, which has the stigma of being housing for poor people.

This is also a challenge in the Netherlands, which has far more social housing than Germany. One in three Dutch homes is owned by a housing association. Here in Amsterdam, the share is one in two. Private rental apartments comprise less than 10 percent of the market. Yet demand for housing still outstrips supply in Dutch cities while rural municipalities and small towns are slow to expand.

What the government should do

One advantage Berlin has over Amsterdam is space. It is four times the size of the Dutch capital. Especially in the former East Berlin, there is room to build. The last thing the city should do is scare away developers.

The national government can help.

It is illegal to evict tenants who pay their rent on time. Rents can not be 10 percent above the local average. Rent increases are limited to 15 or 20 percent, depending on the state.

This has created disparities. Tenants who have lived in the same apartment for years or decades pay low rents. New tenants pay the maximum.

Landlords sometimes resort to shenanigans like classifying repairs as “modernizations” in order to justify rent increases; a loophole left-wing parties want to plug. But that would be adding regulation to solve a problem created by regulation in the first place.

The better option is to either liberalize rents or allow landlords to evict tenants when their contracts expire. (Doing both would shift too much power from tenants to landlords.) In Spain, rent increases are tied to inflation for five years. After five years, owners can either evict tenants or raise rents freely.

Germany should also make it easier to buy a home. It has some of the strictest mortgage requirements in the EU. Buyers need to bring proof of employment, equity and income as well as a credit report and extract from the land register; pay for a property assessment, pay the realtor’s fees and pay between 20 percent and a third of the value of a house out of pocket. Monthly mortgage payments cannot exceed 40 percent of net income. Unlike in the Netherlands, homeowners cannot deduct mortgage interest from their taxes.

Making it easier (or possible!) for Germans with a low or unstable income to buy a home would ease pressure on the rental market. Especially in Berlin, where 80 percent of the population rents.

Leave a Reply

Your email address will not be published. Required fields are marked *