Merkel vs. Schulz

Housing Shortage Gets Political

berlin construction zone, apartment market germany
German construction is booming, but it’s still not meeting demand. Source: DPA

Martin Schulz’s appearance before a German association of home builders last month was something of a tightrope act. The center-left Social Democratic candidate was hoping to score points against Angela Merkel, his rival in September’s federal elections. The only problem: His own party, currently in a coalition government with Ms. Merkel’s Christian Democrats, has been the one in charge of housing policy for the last four years.

For Mr. Schulz, who is lagging Ms. Merkel in election polls, housing affordability could be key to reviving his electoral chances. The former president of the European Parliament has done his best to tap into the populist wave that has gripped Europe over the past year, campaigning on the promise of bringing more social justice to a broken system, unburdening the lower and middle classes.

When taxi drivers, bus drivers or nurses can no longer afford to live within a city, “something isn’t right,” Mr. Schulz said in his address at the “Housing Construction Days” conference in Berlin. He called housing a “fundamental human right,” arguing that when rising rents drive people away from a district they have lived in for decades, it amounts to a loss of basic human dignity.

This kind of talk will sound familiar to people in other capitals like London or New York, where housing affordability has long been an issue. For Germany, however, this is a newer problem. Rents and home prices were largely flat here for decades. It’s only in the past 10 years that Germans have started to face the same kinds of affordability problems as other countries.

According to a renters’ association, Germany is short as many as 1 million housing units.

Mr. Schulz, then, was speaking to what is set to be a hot-political issue throughout this election season. Germany will choose a new parliament – and effectively a new chancellor – on September 24. More than half of Germans rent their homes – a higher percentage than most developed countries. But rising rents, the result of a shortage of new apartments, are pricing more and more people out of the market, while surging housing prices mean that many can’t transition to buying their own property even if they wanted to.

Germany didn’t experience a housing bubble in 2008, but that doesn’t mean politicians shouldn’t watch out for it. “The price increases in large cities, but also in medium-sized German cities, are showing an exaggeration,” Andreas Dombret, a board member in charge of financial stability at the Bundesbank, told Handelsblatt last month.

The problem is evident from a study presented by the Prognos Institute at the conference in Berlin last month (see graphic below), which says rent and income have become decoupled. Even for middle-income households, it is becoming increasingly difficult to find an affordable place to live. For more than half the population, paying for housing is a challenge.

27 Avg cost for 70 sq m new apartment-01

Take the German capital Berlin. Back in 2007, the average Berliner would spend 21 percent of their income on rent. By 2016 that had jumped to 31 percent, according to another study by Empirica. It’s the same story for homeowners, who would spend about 23 percent of their income on a mortgage in 2007. Last year, new property owners had to fork out over 39 percent of their monthly paycheck.

Much of the reason for the rising rent and property prices comes down to changing investment patterns. Germans have put more money in homes since the financial crisis, because they can’t earn high interest rates elsewhere, while foreign investors have thrown money at German real-estate as a safe haven during the euro zone’s debt crisis. But some of it is also down to politics. A housing shortage affects about one third of Germany’s municipalities, triggering criticism of both Mr. Schulz’s party and Ms. Merkel’s Christian Democrats.

Both parties are currently in a coalition government, but with elections coming up, they are also political opponents. That means rival plans are in the works on how to deal with the housing shortage.

Nearly every German party agrees on at least a part of the solution: Subsidies for property owners, and for construction. Ms. Merkel, for example, has announced plans to provide tax incentives to encourage building renovations. Her party also wants to expand tax write-offs for mortgages from 2 percent to 3 percent of the total property price. Even the head of the pro-business Free Democrats, Christian Lindner, has called for tax breaks for families.

Andreas Ibel, president of the builder, development and property management association BFW said all of this this was “a good sign,” but that it “won’t lead to a single apartment being built.” And that is where a big part of the problem lies.

23 p8 Supply and Demand-01

According to estimates from the country’s renters’ association, Germany is short as many as 1 million housing units, despite a construction boom that is already taking place. To make up the difference, the country needs to build 400,000 new living spaces each year.

So what would help increase the country’s building stock? Mr. Ibel urges a more consistent legal environment. Real estate firms struggle with ever-more complex regulations issued with increasing frequency. It takes about five years to develop a large-scale apartment project, he said, but regulations can change repeatedly during that time. “We need to make things simple again, and we need incentives,” Mr. Ibel said.

There are some plans out there by parties to improve the construction situation too. The pro-business Free Democrats want to ease the tax burden on people buying land, by exempting land acquisitions up to a value of €500,000. Finance Minister Wolfgang Schäuble has also criticized states for taxes on land transfers averaging 5.3 percent, which he called “an enormous additional hindrance” to home ownership.

But it is Mr. Schulz who is pushing most aggressively on housing policy. He’s pushing for everything from expanded low-income subsidies to tougher rent controls

27 Housing Construction in 2016-01

This, despite the fact that his party can’t escape some of the blame for Germany’s predicament. For almost four years, the left-leaning SPD has headed up the Federal Environment and Building Ministry with modest results. Residential construction has increased, but not enough. “That can’t continue,” the SPD leader said in Berlin. In short, there’s still a mountain of work to be done.

Mr. Schulz said he would ensure more apartments were built, above all government-subsidized housing for low-income families. He cited the loss of more than 1 million social housing units in Germany over the past 15 years as an “alarming trend,” and proposes one quarter of all new apartments built be low-income subsidized.

The federal government has upped spending in this area, but it hasn’t taken the lead. Since 2007, individual German states have been responsible for building social housing, but the federal government is providing them with additional funding until 2019. Mr. Schulz wants the federal government to take over responsibility, even if that meant changing the constitution.

He also raised a lack of housing suitable for the elderly, an issue he says doesn’t get enough attention given the aging German population. If more and more people feel their contribution to society isn’t valued, “that is a great political danger,” he said, alluding to the successes of right-wing populist party Alternative for Germany (AfD).

Still, Mr. Schulz said more attention should also be paid to rural regions – something borne out by the data. The Federal Statistics Office shows an increase in residential construction across Germany in recent years, but some states have seen a bigger rise in investment than others. Spending on residential construction in Berlin almost tripled between between 2008 and 2016, the biggest rise in the country. Bavaria, Germany’s richest and largest state attracted the most spending, at €12.7 billion, up 137 percent since 2008.

“Germany is bigger than just central Berlin,” Mr. Schulz said. If that argument holds water, it may garner him a few more votes come September.

 

Christopher Cermak and Grace Dobush are editors with Handelsblatt Global in Berlin. Silke Kersting reports for Handelsblatt on consumer protection, construction, environmental policy and climate change. To contact the authors: cermak@handelsblatt.com and  kersting@handelsblatt.com  

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