Why the cranes are standing still
There are few better examples of the gridlock inside the German government than in housing policy.
Dear Reader,
There are few better examples of the gridlock inside the German government than in housing policy.
In its coalition pact, the ‘traffic light’ coalition committed itself to building 400,000 new homes every year for the duration of this government. That would have meant an increase of over 100,000 on the average from previous years.
Instead things have gone in the other direction. After the number of completed new homes stagnated last year, the future looks gloomy.
This week the Federal Office for Statistics released figures that showed building applications had plummeted by close to 30 percent in a year - the biggest drop in planning approvals in 15 years. Even the housing ministry struggled to find a silver lining, describing the figure as “pretty awful.”
Meanwhile, the country’s largest real estate company, Vonovia, has frozen all new building projects and is rumoured to be in serious financial difficulty as it struggles to to meet debt obligations in this new era of high interest rates.
Vonovia owns half a million apartments nationwide. It claims that the current costs of building would mean that they would have to demand a rent of €18 per square metre, an amount that is unaffordable to the average German.
Costs are being driven up by a variety of factors. Skilled labour shortages and rising costs for raw materials are pushing up the basic cost of a build. Then there is the rapidly rising interest on bank loans.
Lastly, the German government is pushing up the cost of construction through ever more complex building regulations. The latest of these is an effective ban on gas heating that is supposed to come in at the beginning of next year. It means that homes will have to be equipped with more costly heat pumps.
There are a few ways that the crisis in the housing market could be controlled.
Local governments could lower the level of the land transfer tax. The crisis in the real estate sector has already led to revenues from this tax collapsing by a third so far this year. Whether state governments will consider cutting this tax at a time when costs have just gone up to afford a big increase in public sector pay remains to be seen.
The federal government could lower the price of land by cutting into green belt areas, but the Green-controlled environment ministry is loath to do this. Environmental concerns also make it unlikely that that the government will loosen building standards.
Alternatively, the government could pump some 50 billion euros of public money into subsidising new construction projects. But the Free Democrats, who control the Finance Ministry, wince at the notion of rubber stamping yet more public spending obligations at a time when the federal deficit is growing.
While the Greens and to a lesser extent the Social Democrats would have no problem with using subsidies to achieve government targets, the Free Democrats are convinced that inflated public spending will worsen inflation and thus only make the problem worse.
In other words, we are stuck. Real estate lobbyists are screaming that the sector is heading for a “tipping point” when skilled labour will be lost for good, but the government has so far shown little urgency.
The shrillest headlines in the German press about a housing crisis driving up homelessness don’t seem to be borne out by the figures. Homelessness has actually dropped in recent years even as the population has grown.
Nonetheless, this is surely bad news in the long run for the country’s economy. Up until now, Germany has been attractive to foreign workers due to its stable wages and reasonable cost of living. An expat survey published last year already put Germany rock bottom on a list of 52 countries primarily due to the fact that people find it so hard to find housing.
Munich now rivals Paris in terms of the strain rents puts on people’s purses. In the great fight between ageing western economies for the best minds from the developing world, the housing crisis is killing off one of Germany’s main advantages.