How to solve Germany's housing crisis
Olaf Scholz' government thinks it can solve the housing crisis by throwing more money at the problem. A combination of deregulation and higher taxes would be better.
The Scholz government titled its coalition agreement 'Mehr Fortschritt wagen,' meaning 'Daring to make more progress,' and it didn't hold back on the ambition of its promises.
Regarding housing, the agreement pledged the construction of 400,000 homes annually, a quarter of which were supposed to be social housing.
Given that the record number of apartments built in any year this century is 306,000, that was a pretty swaggering target.
Through a massive increase in home construction, Germany would tackle the outrageous rents being demanded by landlords in an ever-tighter housing market... or that was the plan,
Could the government genuinely accelerate construction to the extent that, in effect, a city the size of Kassel would be built in addition to current construction every single year?
The short answer is - no, it couldn't.
Given what we know now, Scholz's team should have given the more humble promise of merely trying to maintain the rate of building that already existed.
Although, to be honest, they don't even stand a chance of maintaining those numbers.
Figures released in July by the Ifo Institute, Germany's foremost economic research center, project that 245,000 new homes will be built this year, dropping to 210,000 next year and just 175,000 in 2025, the final year of the ‘traffic light’s’ first (and probably last) term in office.
To give them their due, Scholz’ motley crew of neo-liberals and greenies wrote their coalition agreement at a time when central bankers were still calling inflation a 'passing phase’.
The Russian invasion of Ukraine put a flame to the brittle wood that had been piled up by years of monetary expansion. And the rest is history.
With the costs of materials, from steel to cement, skyrocketing, the German Chambers of Architects say that construction costs have increased by a third since the beginning of 2021.
Meanwhile, the fact that the European Central Bank has responded by raising interest rates means that demand has also been hit, as many home buyers can no longer afford the interest on a mortgage.
"The main reason for the decline is the significant increase in financing costs and construction services," says Ludwig Dorffmeister, housing expert at the Ifo Institute.
But that’s not all. Scholz and his ministers can’t just point the finger at Russia and pretend that the shock rise in costs is an act of God.
"At the same time, the federal government has significantly reduced new construction subsidies and tightened standards for new construction once again in early 2023," Dorffmeister adds.
One of the first actions taken by the Scholz government was to let federal subsidies via the KfW state investment bank run out. Simultaneously, they have been tightening build standards to try and improve energy efficiency and to make heating greener.
These policies primarily have the signature of the Green party on them.
The eco-party secured a clause in the coalition agreement that committed the government to effectively banning gas heating installations starting in 2025. Once in power, Green party bigwig Robert Habeck used his position as Economy & Climate Minister to draft a law that brought that deadline forward to 2024.
That proposal caused the biggest stink of this legislative period yet.
Tabloid Bild nicknamed it the 'Heizhammer' (heating hammer), and even liberal glossy Der Spiegel depicted Habeck on its front cover as an 'overzealous' imbecile leading Germany 'into chaos.'
What eventually passed through the Bundestag this month was a heavily diluted bill that initially will only apply to homes in officially defined 'new build areas.'
Even the watered-down law has driven the building sector to the barricades, though.
On Monday, Scholz met the heads of the country's most important building associations as part of an 'Alliance for Affordable Housing.' But some, like the homeowner’s association Haus & Grund, pulled out in protest.
According to Haus & Grund chairman Kai Warnecke, the heating bill has driven up costs to such an extent that, even if the government enacts all the cost-saving measures it has promised, construction will still be a loss-making business.
"Even if serial construction, expedited planning procedures, and similar measures are implemented, they will bring in less than what has been ruined by the heating law," Warnecke complained to Die Welt newspaper.
One way out of the crisis is a massive injection of public money. The headline number being touted by the building sector is €50 billion to get the cement mixers churning again.
But Scholz appears to be leery of yet more public spending - i.e. more public debt - after three consecutive years of firing ‘bazookas’ of cash at crises including the pandemic and the Russian war.
He has recently resisted calls for a state-financed energy subsidy for big industry, saying it would fire up inflation. And the building summit also failed to produce any big spending pledge.
But without state subsidies, the other tool touted as necessary to tackle the rental crisis is only likely to make things worse. Left-wingers in his own party are pushing Scholz to introduce a nationwide rental price control. But this mechanism has already been shown to kill off private sector investment as it squeezes profit margins even further.
Are there any solutions then? One provocative question - which doesn’t seem to be asked enough - is if we need all the additional housing in the first place.
For all the talk of a housing crisis, a simple fact that is almost always ignored is that living standards are far higher now than they were even thirty years ago.
While in 1991 the average person had 35 square meters of living space to themselves, that has risen to 48 square meters today.
Put another way, whereas in 1991 there was a total of 2,800 square kilometres of living space in the country, that has ballooned to 3,971 square kilometres for a population that has barely grown.
That means more urban sprawl, more cramped inner cities, and the destruction of green spaces (see the repeated attempts by the Berlin city government to send the diggers into the unique Tempelhofer Feld park.)
One could argue that 48 square meters per person is a perfectly adequate amount. The question then becomes: how does the government intervene in such a way that the existing housing stock can be redistributed in a more equitable way.
In Germany’s tenancy-based society it is a well-known problem that pensioners often live in flats that are too big but don't want to downsize because 1) moving is bothersome and expensive and 2) they would, absurdly, end up paying more on a new contract for a smaller place.
Interestingly, one of the government’s own economic advisors is calling for a radical shake up of rental law to try and force a reallocation of the living space that already exists.
Dr. Steffen Sebastian, who heads the federal rental commission, says that the solution is to abolish all rental controls. These controls, which lock landlords into the terms of old rental contracts, are essentially subsidising older tenants while punishing newer ones, he argues.
"It's just not fair that the state provides extreme protection for people who have been paying a low rent for decades, regardless of whether they are needy or not, while others simply can't find affordable housing,” says Sebastian.
His proposal is to syphon off some of the profits that housing associations would make in an unregulated rental market and give them to the poor as rental support. People with too much living space would be pushed to downsize, freeing up space for those who need it.
Sebastian’s ideas seem to make a lot of sense - but they are probably too bold and idiosyncratic to be taken up by any of the established political parties. For the left, uncapping rents is anathema. For the right, pushing middle-class boomers out of oversized apartments sounds like “telling people how to live.”
The solution that politicians will pick instead is already clear: come up with a more humble building target and pretend that the old one never existed.
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