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Renters Pay the Bill for Market Failure and State Failure

by Andrej Holm Thursday, Jun. 09, 2016 at 1:57 PM

The extensive privatizations of the last 15 years have contributed to a market radicalization. Privatization was the door opener for the growing influence of financial market logic in housing. Developing a cooperative or nonprofit sector is a necessary and feasible alternative.


Interview with Andrej Holm

[Andrej Holm on the supply and shortage of living space in Germany. Holm is an academic researcher at the institute for Social Sciences of the Berlin Humboldt University. His research themes are gentrification, housing policy in the international comparison and European urban policy. This interview published on March 24, 2016 is translated from the German on the Internet,]

What are the essential reasons for the housing shortage existing in certain metropolises and regions in Germany?

Andrej Holm: The housing emergency that threatens in some cities has different causes. Besides demographic effects and the strong migration gains of certain cities in the last years, there are economic and political causes that led to the current problems.

Reducing the shortage of housing to the disproportion between strong population growth and stagnating or declining construction is too simplistic. Investments in new buildings are not attractive enough for many private market actors. This has more to do with the growing profit expectations of investors than with the high construction costs. There is no great interest in new apartment buildings as long as a high profit can be realized with speculations on intense rent increases. Lobbyists of the construction industry point again and again to the cumbersome approval procedures in building projects. Construction was not prohibited in Germany. The trifling number of new buildings despite higher populations shows that the greatly praised market mechanisms are not effective. In addition to these market failures, local communities nearly everywhere have withdrawn from new apartment buildings. Unlike in past decades, market failure is not compensated by state investments. Renters pay the bill for this double failure of the market and the state with higher rents and seekers of housing are completely excluded from the housing supply.

What kind of living space is lacking and in which cities and regions is this housing shortage very striking?

Andrej Holm: Affordable apartments for low and medium incomes are lacking. There is no housing emergency in luxury housing. The prices are even falling there. The lower the income, the tighter the housing supply. Studies show low earners often spend 50% or even 60% of their small incomes for housing. Not much is left for life. The situation in the growing big cities and in a series of university towns is especially drastic. Monopoly positions of suppliers are intensely exploited through the growing population numbers and the high new rental figures through frequent changes in apartments.

The paradox of the present situation is very clear here. Since the housing markets are strained and prices soar, there are few incentives for new buildings since enormous profits can be gained in the holdings. A solution of the problem must include substantial restrictions of the profit expectation speculations that are now possible with housing.

What role was played by privatizations of housing holdings in the past and what role can public housing enterprises play in the future?

Andrej Holm: The extensive privatizations of the last 15 years have contributed to a market radicalization. Great portfolios were sold so privatization interested institutional investors above all. Far more than two million apartments are more or less directly rationed by banks, real estate funds and other financial market actors, it is estimated.

Privatization was the door opener for the growing influence of financial market logic in housing supply. This has very different consequences for renters. While profits are gained through disinvestments and savings of personnel on rather relaxed housing markets, the speculation spiral is turning in cities with strong demand. Junk real estate and luxury upgrading are ultimately two sides of one and the same coin. For cities, this is especially bitter be cause local community possibilities are narrowed with the growing problems in the privatized realm. The larger the public holdings of a city, the greater the supply and the effect on the housing market. Public ownership of housing is actually very effective compared with other housing policy instruments – when housing firms are not forced to economizing as unfortunately can be seen in many cities.

Would expanding social housing help?

Andrej Holm: Yes, expanding social housing would increase the number and share of reasonably priced apartments at least in the short term. But the available funds from the federal government, states and local communities are not enough to compensate for the decreases in earlier funding. Although spending increases, the number of available social apartments falls. The incentive system of social housing has three great problems. Building apartments is very expensive, the planned increase of rental prices by reducing subsidies pushes rents up and social apartment building is limited. A large part of the incentives in the past was given to private housing firms that then provided social housing at halfway affordable rents for usually 20 years. After the incentive time periods expired, the social bonds end and former social apartments are rationed at the very normal market conditions. This leads to higher rents and displacement of financially weak residents. Thus building social apartments in its core is economic promotion with an interim social benefit. Other European countries use their incentive funds more sustainably…

You plead for the reintroduction of cooperatives in apartment building. What do you mean and why is that sensible?

Andrej Holm: Cooperatives can be described very generally as preferential tax treatment for services benefiting the common good. New housing cooperatives would have the goal of permanently providing reasonably priced apartments. Businesses would be subjected to a profit-limitation and an earmarking of surpluses. All revenues must then be reinvested in social apartment building. Such a revolving principle would also solve the problems of social housing construction. That a supply of social housing would be in the interest of the general public cannot be questioned. No permanent contribution for a supply of social housing can be expected from private investors. This social blindness of the market is the nature of a profit-oriented rationing system and not the evil will of individual actors. Reintroduction of cooperatives would strengthen the non-profit sector in housing. Developing a cooperative non-profit sector is a necessary and feasible alternative because the market fails and the state will not comprehensively socialize the housing supply. This new sector involves nothing less than a breach with profit logic in housing supply.

[This article first appeared in WISO-Info 1/2016. Besides creating a cooperative or nonprofit sector, long-term low interest loans are a second essential in overcoming the terrible housing crunch in many cities and university towns today.]

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