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The market is more powerful than politics

by Zacharias Zacharakis Wednesday, Feb. 24, 2021 at 12:25 PM

Every year more social housing units fall out of rent control than new ones are built. As a result, the stock of apartments with legally fixed maximum prices is continually shrinking. The negative effects that were feared with the introduction of the Berlin rent cap have largely failed to materialize.

The market is more powerful than politics

Housing summit

There is no longer any question of the primacy of politics over economics in the housing issue. Capital dominates the government, which does not want to change anything.

A commentary by Zacharias Zacharakis

[This article published in Feb 2021 is translated from the German on the Internet, Wohngipfel: Der Markt ist mächtiger als die Politik | ZEIT ONLINE.]

Housing summit: barricaded residential building in Strasburg in Western Pomerania

One might think it would be a nice success that the federal government is now presenting. After all, there is a lot of building going on in Germany, despite the Corona pandemic. Chancellor Angela Merkel promised 1.5 million new homes for the country at the housing summit around two and a half years ago. This Tuesday, a new housing summit was held to take stock of the situation. Well, at 1.2 million new homes, not quite as many have been built as planned, but at least the trend seems to be right. Or is there perhaps a problem that lies much deeper?

Rents in Germany 2020:

The rental boom is over

Building land:

Too much money for a house

Financing without equity:

Actually madness

When the federal, state and local governments announced the start of their major housing offensive in September 2018, the undesirable developments were obvious. Rental prices across Germany had been rising rapidly for years, even exorbitantly in urban centers.

Analogously, the market for residential property also drifted into the extreme, with prices shooting up here as well. The German government promised to tackle both developments, which are essentially related, with determination. Particularly since the housing issue, according to the outcome paper for the first summit, is a profoundly social issue that feeds great dissatisfaction among the population.

The good news after these two and a half years is that rents in the cities are no longer rising quite as fast as before. Instead of the almost double-digit annual percentage increases in metropolitan areas, the increases are now more in the range of less than five percent. That's good news for people looking for a home, but the level in the cities is still so high, of course, at around 12 to 18 euros per square meter, that only the very well-off can afford a new home in the centers. Those whose incomes tend to be further down the scale flee to the outskirts and beyond. Demand there is greater than supply, so it is precisely in these locations that prices have risen the most recently. The housing problem is simply being shifted.

Housing summit - politicians sum up achievement of housing goals.

The German government considers its housing offensive a success. However, there is criticism from the real estate industry, tenants' associations and the opposition.

Ownership rate also falling

So, a lot is being built, but nowhere near enough to increase the supply of housing to the point where the enormous rent increases of recent years would be slowed and brought closer to more normal income trends. One must continue to incentivize private investors so that construction occurs at a high pace, yet housing policy remains piecemeal because the larger approach is lacking. Not to mention that the federal government is failing with its social housing initiative. Every year, more social housing units fall out of rent control than new ones are built. As a result, the stock of apartments with legally fixed maximum prices is continually shrinking.

Underlying these developments is a deeper and even global trend that many politically responsible people in Germany have long refused to acknowledge and which they are now virtually powerless to counter. Land and real estate values have been experiencing almost insane price inflation internationally for years, a trend that is gradually continuing in Germany as well, from the metropolitan areas to the last rural region. Since 2015, the price of building land across Germany has risen by an average of around ten percent a year, according to the Federal Statistical Office, while the price of residential property has risen by around five to seven percent. These are enormous increases that no income development can keep up with.

That's why it's no wonder that fewer and fewer people in Germany can afford to buy their own home, since they have to work hard to save and build up their assets. Real estate can be bought primarily by those who already have larger assets in their families. An analysis by the Empirica research institute last December showed that the home ownership rate in Germany has fallen further, from more than 50 percent in the past to 42 percent now. This means that in no other EU country do so few people live in their own property as in this country. This is another embarrassing result of the so-called housing offensive of this federal government: Two and a half years ago, it had set itself the goal, among other things, of making home ownership more affordable again for broad sections of the population.

But why is the government failing with all the goals it has set for itself in housing policy? In general terms, it can be explained in one sentence: Politicians have long since submitted to the primacy of the economy and the market in the housing issue. They look on, more or less unconcerned, as capital in Germany distributes and prices houses and apartments. Those in power, on the other hand, do not dare to intervene effectively in this market, which regulates such an elementary commodity. The most that the market could be trusted to regulate at the federal level was a much too hesitant rent brake, which has proven to be largely ineffective.

What might effective control of the housing market look like?

The question is what effective control of the housing market can look like. The only state government in Germany that has so far dared to set a serious tone is the Berlin government with its rent cap. The cap has been in place for a year now, and it is actually having an effect: "Since the rent cap came into force exactly one year ago, Berlin's rental and purchase prices for the properties concerned have developed more weakly than in other major German cities," says the Munich-based Ifo Institute soberly on the anniversary of its introduction. This means that the political instrument of the rent cap not only regulates the rental market, but can also slow down the rapid price inflation of real estate values.

It is therefore not surprising that the demand for a nationwide rent cap is being formulated by more and more political players on the occasion of this housing summit, and trade unions and the tenants' association have joined the call. After all, they too see that the negative effects that were feared with the introduction of the Berlin rent cap have largely failed to materialize. After all, construction in Berlin is continuing or even increasing, and permits for new buildings actually rose in 2020, including those for rental apartments.


Editor for Economy (Business), ZEIT ONLINE

What is problematic, however, is that many owners have stopped offering their apartments on the market since the introduction of the rent cap; this is reflected in the drop in the number of rental advertisements. The overall supply is therefore scarce. However, this can be explained primarily by the legal uncertainty that still exists in Berlin. The rent cap is currently being reviewed for validity by the Federal Constitutional Court. Many owners hope that the court will now overturn the law and that they will then be able to offer their apartments again at the higher level. That is why they are waiting to see what happens.

However, if the rent cap is upheld by the Federal Constitutional Court, these owners will also have to make a decision: either rent at a lower rate or sell. These apartments will not be lost to the market for all time; they will still be there.

So, there is still hope that politics can regain its primacy in the housing issue, as the Berlin experimental laboratory proves. After all, everything that has happened so far at the federal level on the housing issue has had little to no effect. Therefore, political leaders should seriously ask themselves whether they want to intervene much more decisively in the market - for example, by imposing a nationwide rent cap in certain regions. At any rate, the timid policies of recent years will not get us anywhere.

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