A huge affordable housing crisis has led to increased rent and land prices in Germany. Inadequate construction, lack of social housing units, and rising number of immigrants in the country are increasing housing prices even more. Can effective measures from the government help to curb the affordable housing crisis in Germany?

 

Living in Germany is becoming more and more expensive as the country is facing a severe shortage of affordable housing. According to a recent analysis, rents in 12 out of 13 Berlin districts are more than 30% of the average net income of the Germans. The housing prices and rents have started to increase substantially since 2012 as the housing supply is unable to keep up with the demand in some parts of the country. While new construction has taken place in the upper end of the market, not many developments have been made in the compact and affordable apartments, which has created a significant gap between demand and supply chain. The rising housing prices show no signs of slowing down even after the economic crisis brought upon by the coronavirus. The prices for existing apartments in Germany have spiked up to 10% while the prices of new apartments increased by 7% in 2020.

 

Germany: A Nation of Renters

Around 54% of Germany’s households rent their homes, and renting has become more common in the cites like Berlin and Hamburg. So, the prices are significantly higher in these cities than in others like Rhineland-Palatinate or Saarland. Government subsidies provided to the renters coupled with strong federal renter protection are increasing the renter ratio in the country. Almost 90% of rental units include multifamily buildings, apartment blocks, and row houses, mostly occupied by single-person households and single-parent households. 85% of the renters are between the age group of 25-34 years, while slightly more than half of the renters are above the 75 years age group. The young age population tends to remain longer in rental accommodations due to the high costs of buying homes.

 

Even after taking up the homeownership, buyers are incentivized to rent out their place rather than occupying the homes. The buyers get the advantage of the reduction in their mortgage rates when they rent out their house. Besides, the high cost of housing makes moving in very costly for the owners. More than half of the private landlords are non-professional owners, whereas public entities or privately-owned housing companies account for less than one-quarter of rental dwellings. 

 

Fewer Construction, Rising Housing Demand

Germany is lacking around 670,000 apartments, especially in metropolitan areas and growth regions, and nearly 43,000 social housing units get occupied every year, which is creating a grave shortage of new housing for renters. According to the Federal Statistical Office of Germany, demand for housing continues to expand with population growth, good labor market situation, and migration of immigrants, which is estimated to be between 110,000 to 300,000 by 2030. Municipalities are responsible for earmarking land for construction and issuing building permits in Germany, but the gap between the number of building permits and completions is ever-expanding. Shortage of skilled construction workers, high land prices, and complexity of building codes are widening the demand and supply gap, thus contributing to the severe shortage of houses in the country. Besides, scarce land building in metropolitan cities, long-term building permits, and multi-year construction projects are some of the factors responsible for relatively low house market supply while the demand continues to increase substantially.

 

Huge Waiting List for Social Units 

Households willing to live in social housing units need to apply for a certificate of eligibility, which generally takes into consideration the household income. Only those who receive this certificate are eligible for a social housing unit, but there are endless waiting lists. Those with special needs or already receiving social benefits can apply for the certificate. Besides, renter households that do not receive any transfers related to housing assistance are eligible for the certificate, but the rental price can vary depending upon the household size, total income, and housing cost. 

 

Implications to Solve the Hardly Elastic Housing Supply Problem in Germany

 

Enhancing Accessibility to Building Land 

Lack of building land is one of the significant factors responsible for the housing supply problem. The shortage also reflects in the increased price of building lands that grew by 50% within 2010-2019 across the country. However, prices of building lands doubled from 2016 to 2021 in some of the largest German cities. The exhausted inner-city building lands have created a need for the development of cities and increasing mobility of the urban population to the surrounding areas to create more living spaces. Besides, densification of accommodations in German cities can help to generate space for about 2.3 million to 2.7 million apartments. The pre-requisite for population growth in surrounding areas of the cities would require the development of public infrastructure intended for general interest such as schools, kindergartens, medical care, parking spaces, etc. 

 

Delay in issuance of building permits due to regulation-intensive and interest-driven approval procedures owing to lack of human resources is exacerbating the housing supply-demand. Thus, mitigating the scarcity of human resources that overlook design and practical implementation of development plans as well as the designation of buildings could expedite the issuance of building permits. Besides, reducing the transaction costs for the acquisition of building land, eliminating interim buyers, and incorporating lean procurement procedures can help in the success of infrastructural projects at a rapid rate. 

 

Rental Brake 

Introduced in 2015, the rental brake intends to counter the price trend on the rental apartments. The law restricts house owners to increase the rent by more than 10% above the local comparative rent in new rental contracts. Since the rent varies from region to region, rent brakes have been established in the states or municipalities rather than nationwide. After the introduction of rental brakes, prices in metropolitan areas fell by 3% however, rental prices continued to increase in unregulated markets. In Feb 2020, the German government passed the extension of the national rent brake for another five years to dampen the effect on overheated rental markets. Additionally, the stringent rent brake allows the tenants to reclaim the excessive paid rent, which could prevent them from exploitation of the homeowners.   

 

Increasing Job opportunities in Urban Areas

Advanced tertiarization in cities leads to an increasing number of opportunities, which results in internal migration from rural to urban areas. This leads to the elevating demand for housing in metropolitan cities, and that contributes to their rising prices. The good situation of the labor market for years with a high level of employment and expansion of universities in the region have resulted in increased demand for housing. Mostly, low-income groups make the migration to towns however, they are unable to find accommodation due to hefty rental prices. Increasing job density in rural and suburban areas with the expansion of public infrastructure can help to reduce the extent of internal migration, which could significantly create less demand for houses in overburdened cities. With the increasing penetration of broadband in rural areas, rising work-from-home culture, and reduced housing costs, more people are preferring the countryside over cities. The shifting trend could largely influence the pricing in the coming years. 

 

State Interventions to Solve the Housing Problem

Social housing unit developers require to rent out their accommodations at below-market rates for 15-20 years, for which they are subsidized and granted interest-free loans. However, fewer unit developers are willing to construct social housing units due to less rent and extended commitment period, which is putting stress on the low-income households. The government has earmarked a sum of USD1 billion from 2020 to 2024, in an effort to drive the construction of social housing. However, the granted sum is 30% less than what was provided in previous years. 

 

German Civil Code renders protection to renters, ensuring stability and security to them. The landlords are responsible to commensurate for reasonable wear and tear in housing units, which eliminates the additional burden for the dwellers. If the landlords do not rectify the deficiencies in the units, the renters can achieve rent reduction. Also, the homeowners cannot raise the rent arbitrarily however, they can pass certain costs and property taxes on to the renter. In Germany, the leases are typically open-ended rather than on yearly basis and both parties require to provide a notice period of three months to terminate a lease. However, evictions can be enforced if the renter fails to pay rent for at least two months, but prior warnings are compulsory. 

 

Many people lost their jobs due to the economic disruptions caused by the COVID-19 pandemic. The government has planned to provide housing assistance to people who are unable to make the ends meet. The government has put a ban on the evictions for renters who had failed to pay their rents between April and June 2020, resulting from employment losses. 

 

Conclusion

The COVID-19 pandemic led to job losses and shutting down of businesses, which resulted in vacant commercial premises, industrial halls, hotels, and buildings, which are now being utilized to create accommodations. Besides, due to the rising trend of work from home, many vacant office buildings are being converted into residential spaces to fulfill the burgeoning demand. According to the Alliance for Social Housing, some 235,000 new apartments are expected to be created in offices and administrative buildings. With the increased regulatory framework in the areas of energy efficiency in the construction segment, the developmental costs of buildings have risen exponentially, thus restricting the growth of new buildings. However, temporary suspension or even abolition of these frameworks are not easy to revise or adjust as they could lead to conflicting goals.

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