Does Germany have an answer to the housing crisis?

There’s a school of thought that blames the housing crisis on home ownership: all that mortgage finance pushing up prices and giving home owners an incentive to oppose new development. A properly regulated rental sector would provide a secure, but flexible, alternative. Just look at Germany, where most people rent their homes. Rents are lower than in the UK and tenants have more rights. Furthermore, Germany was one of the few western countries not to experience a housing bubble in the years before the financial crash.

In this decade, there’s been a modest but steady rise in German house prices. This might be a reaction to the Eurozone crisis, with investors looking for a safe haven for their money: it doesn’t get much safer than Germany’s unexciting property market.

In Berlin, however, things have been hotting up. By rights, the capital of Europe’s biggest economy ought to be a global metropolis like London or New York – with ridiculous rental values to match. However, Berlin’s history set it on a different path. Thankfully, the 21st century has been less traumatic than the 20th, and the city quietly gained a reputation for affordable urban cool.

Needless to say, it couldn’t last – not the affordability bit, anyway. According to an article by Joanna Kusiak for The Conversation, the housing market is up sharply – with a 20.5% increase in 2017 alone. Renters are paying the price:

“As demand for housing in Berlin has grown over the past 15 years, rents have been driven up to the point that – according to a recent study – 40% of Berliners aged between 45 and 55 are unlikely to be able to afford to stay in the city after they retire. Unless housing is socialised, that is.”

The city does have rent controls – a system known as the Mietspiegel or ‘rent mirror’. Basically, it’s an index of rent levels over recent years that serves as a guide to what a fair rent should be for properties, according to type and location. In other words, a very German system of consensus-building through established precedent.

But in Berlin the constraints are breaking down. Large-scale private landlords, owning tens of thousands of flats, have such an outsize influence that they can shift the Mietspiegel firmly in their favour.

This has provoked a campaign to use an obscure clause in the German constitution to renationalise the property through compulsory purchase:

“If successful, the move could provide a legal precedent for other cities to call for nationalisaton as a modern and legitimate solution to their housing crises. It could also prompt changes to international law, empowering legislation initiatives that see housing as a human right, as a strategic resource or as global commons.”

This attempt to ‘take back control’ fits the great political pattern of our time – the struggle between global frameworks and local democracy (or ‘open versus closed’ to use the biased language of the globalisers):

“Berlin’s housing corporations are active on the international stock market, and taking their property would lead the city government into a confrontation with international law which, in general, strongly protects corporate private property.”

Therefore, I’d be very surprised if the local campaigners win a legal battle – especially if they want to use the compulsory purchase powers to pay less than the inflated market values of the properties concerned.

A better way forward would be to use the tax system. If property prices go up by a fifth in one year, it’s not because the buildings suddenly got 20% bigger – it’s because the land on which they’re built got more valuable. All the landlord has to do is sit on his land and count the profit. The answer is to tax this unearned wealth – at a significantly higher rate than taxes on earned income and returns from genuine entrepreneurship.

Of course, heavy taxation disincentivises work and investment. With a land value tax, though, it is speculation that is disincentivised. However, if private landlords can’t make a profit from rising land values, they may decide that managing the buildings isn’t worth the bother. So, what if they decide to sell up and walk away?

Well, in that case the housing reformers of Berlin will get what they want – they can buy the offloaded stock at a reasonable price and transfer it to social ownership. There are many different models – including council housing, housing associations, housing cooperatives and community land trusts. Try them all and see what works best where.

Nationalising – or, rather, socialising – housing stock would appear to be a defeat for the free market: the frontiers of the state rolling forwards instead of back. Certainly, such a move could be seen as ‘crowding out’ private investment and thus a vital source of the innovation and entrepreneurship on which wealth creation depends. Land, however, is not like other kinds of wealth. On any economically relevant timescale and in any normal circumstances, it can be neither created nor destroyed.

Rent, therefore, is not a reward for wealth creation, but rather an overhead that wealth creators have to pay. The lower the rent the more efficient the market.

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Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.

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