Squeezed Out Rocketing Rents Become Election Issue in Germany

By Horand Knaup, and

DPA

Part 2: Declines in Subsidized Housing


New environmental regulations aren't the only thing making housing more expensive. For example, the government in the southwestern state of Baden-Württemberg, led by a coalition of the SPD and Green Party, unveiled its plans for an amendment to the state building code in early December. Under the proposed new rules, new developments would have to provide more space for bikes -- even on properties where there is no obvious need for such space.

Likewise, as the scope of building regulations is expanding, individual states are scaling back their own spending. Since 2006, states and municipalities have been jointly in charge of building low-income housing. Although the federal government provides them with annual subsidies totally €500 million, reforms in laws governing its interactions with state governments bar it from imposing any regulations.

But, for years, municipalities have been investing very little in low-income housing, preferring to spend the federal government's money on other things. The city-state of Berlin, for example, collects about €32 million a year for this purpose. But instead of spending the money on new low-income housing, it uses it to repay old loans.

Over the last decade, such practices have led to a decline in the number of subsidized housing units in Germany, from about 2.6 to 1.6 million. At the same time, municipal housing associations are the first to force green renovation and the corresponding rent hikes on their tenants.

For far too long, lawmakers believed that the housing shortage was an old problem that had already been solved. Given that the population is aging and no longer growing, they reasoned, why should they worry about a lack of housing? Instead, they believed it was necessary to demolish empty prefabricated concrete apartment buildings and abandoned villages.

For a long time, they were right: Except in a few booming regions, rents rose more slowly than other living expenses. But now the situation has fundamentally changed. Although Germany's total population is stagnating, more and more people are crowding into its urban areas. And since more and more people are living alone, the number of households nationwide is actually climbing. Likewise, people who commute to their jobs sometimes need two residences, and many Germans expect each new apartment or house they move into to be a little bigger than the last one. The average citizen now uses 43 square meters of living space, or eight more than they did 20 years ago.

Proposed Solutions

Local communities, however, have been far too slow in reacting to these developments. Ulrich Pfeiffer, a former Building Ministry department head who now serves as the supervisory board chairman of Empirica, a real estate appraisal and consulting firm, accuses city and town officials of hoarding land available for building and only selling it to investors at exorbitant prices. In fact, there has been a sharp decline in the number of residential building permits issued in recent years, from 639,000 in 1995 to 228,000 in 2011. In addition, Pfeiffer claims that local authorities are imposing unnecessary but costly conditions on developers. "In the end," he says, "all of this affects rents."

But what can policymakers do? Building Minister Ramsauer's proposal to house students in floating dormitories, for example, doesn't solve the problem and is more indicative of a general helplessness than anything else. By comparison, proposals by local politicians and tenant advocates to enact legislation to reduce costs ought to be taken more seriously.

Experts agree that such a radical approach can work, but the question is whether the risks and side effects of new market interventions won't actually make the patient even sicker.

The DMB renters' association, for example, has proposed a rule that would limit rents on new leases to no more than 10 percent above comparable local rents. At first glance, this seems like a good idea: At times when the demand for housing is artificially inflated by cheap money and capital from Southern European investors, the government has to find ways to prevent the development of real estate bubbles.

But the real question is how this concept should be structured. If the government sets a nationwide ceiling on price increases, as the DMB proposes, it will deter investors in regions where there are genuine housing shortages. But if the ceiling only applied in booming markets, the authorities would have to identify the cities in which price increases are excessive and those in which they are acceptable. Experience has shown that government agencies are rarely right when it comes to making such assessments.

A no less dubious plan is that of the local administration in Berlin's northern Pankow district, which entails imposing a ban on so-called "luxury modernizations." Starting in January, it will be prohibited in much of the district to install a second bathroom or radiant floor heating system. This is the local administration's way of preventing a sharp rise in housing prices after renovations.

The initiative is well intentioned, but experts doubt it will produce the desired results. A family with several children will not necessarily perceive a second bathroom as a luxury. On the other hand, speculators could hit upon the idea of upgrading their properties by installing platinum-plated fixtures. These examples illustrate why officials with property owner associations, among others, believe that such programs are mostly ineffective.

City planners are also hardly likely to be galvanized by SPD chancellor candidate Steinbrück's proposal to start building low-income housing again like it was done in the 1960s and '70s. They remember all too well how the government-subsidized bedroom communities of the day often deteriorated into ghettos for welfare recipients.

Needed Legislation

Indeed, it is worth noting that the construction of low-income housing no longer plays its traditional role in the Social Democrats' campaign platforms. The most recent plan stems from Achim Grossmann, a former senior official in the Building Ministry, developed with a small team of experts at the request of SPD Chairman Sigmar Gabriel. The document envisions a stronger social integration of redevelopment areas in large cities as well as the targeted promotion of housing cooperatives.

The SPD is also thinking about simplifying the so-called "Wohn-Riester" (a government-subsidized home loan and pension-savings plan), blocking the sale of public housing associations and strongly limiting the share of residential spaces that can be converted into vacation rentals or offices.

Granted, such measures can create a few more housing units. But they will not forcibly bring about a real shift in trends affecting the real estate market. Instead, fundamental reforms are needed in the areas of politics that caused the problem in the first place. If rent increases are to be limited, state and local governments will have to invest more money in the construction of residential housing, simplify their building codes and classify more property as residential. As Hamburg Mayor Olaf Scholz puts it: "The amount remains the deciding factor. Believing in other panaceas would be an illusion."

It would also be helpful to adjust the goals of the Energiewende to better conform to financial realities. For example, instead of insisting on complete renovations, which are hardly worthwhile for either landlords or tenants, it would be better for the environment if property owners insulated doors and windows at a minimum.

The most important thing, though, is to tackle the problem of real estate speculation, which many experts believe has taken hold in a considerable portion of German cities. This, of course, is the most difficult task for politicians, as it is based on no less of an assumption than that the euro crisis will someday end.

Until then, to the delight of Berlin brokers and their customers from Southern Europe, rents will continue to rise. Italian small investors remain very interested, says broker Mingazzini, adding that all of Berlin is in demand, and that the reputation of an individual district doesn't really matter. "If an apartment is only a few subway stations from Friedrichstrasse, it's perfect," he says, referring to a major culture and shopping street in downtown Berlin.

Translated from the German by Christopher Sultan

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