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Housing Nightmare in Germany: A Race to Find Shelter

By Benedikt Hornung

Edited by Nico Herrlett & Gigi Kordula

Germany, a nation steeped in tradition and renowned for its thriving economy, is in the pains of a housing crisis that threatens to undermine its social fabric. An alarming surge in housing costs, a dearth of affordable options, and a growing army of renters create a perfect storm. As the struggle for housing intensifies across the country, it becomes increasingly evident that this crisis is not just an economic issue; it is a matter of human rights and social stability.

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The Nation of Tenants: A Struggling Majority

Traditionally, Germany has been a nation of tenants, standing in stark contrast to its European neighbours. While homeownership is the norm for around 70 per cent of the population across Europe, only 46 per cent of Germans own their homes.

This divide is even more pronounced in major cities, where the dream of renting a spacious apartment can quickly turn into a nightmare. The culture of tenancy leaves large portions of the population vulnerable to rising rents in a housing market influenced by nationwide and global dynamics.

The Painful Cost of Housing: Breaking the Budget

The average net income in Germany, approximately 2.165 euros, stands as a testament to the financial reality its residents face. This amount represents what is left after deducting taxes and social security payments. Nearly one-third of this income is absorbed by rent, leaving households grappling with a financial burden.

Experts warn that rent exceeding 30 per cent of income increases the risk of poverty, posing a major threat to the wealth of the German middle class. This threshold was initially established in the 1937 U.S. Housing Act to provide affordable housing options for low-income households. Nowadays, it aims to enable households to balance affordable housing without sacrificing other essential needs.

Berlin, a bustling metropolis and a beacon of culture, exemplifies the housing problem. In the affluent district of Charlottenburg, a spacious four-room apartment spanning 182 square metres comes at a staggering monthly price of 8,190 euros. After adding utility costs and other incidentals, this equates to over 50 euros per square meter.

In Munich, the rental costs have soared to nineteen euros per square metre, while Stuttgart, Dusseldorf, and Cologne follow closely, at twelve to thirteen euros. Immoscout24, an online portal, paints a grim picture where a growing demand for affordable housing collides with historic rent hikes and an inadequately supplied market.

The Rental Price Cap: A Game of Loopholes

A glimmer of hope arrived in June 2015 when Germany introduced a rental price cap in its Civil Code. This cap restricted new rental agreements from exceeding ten per cent above the local comparative rent. In addition, it allows for a maximum rent increase of twenty per cent within three years for existing tenants.

Despite its popularity among tenants, the rental price cap was criticised by landlords and representatives of the real estate industry. Many private investors used real estate to provide for their retirement, but with the rent limit, their financial plan was endangered.

However, in major cities like Berlin, landlords have found a way to bypass this regulation. The cap does not apply to furnished apartments and short-term contracts. Consequently, more than half of Berlin's apartments are now offered as 'furnished', evading the rent cap's reach.

Economic Impacts and Policy Failures: A Dangerous Nexus

As interest rates rise worldwide, real estate prices are surging. A study by the Ifo Institute and the Institute for Swiss Economic Policy predicts an annual global price increase of nine per cent over the next decade, with Germany poised for a seven per cent hike.

However, rising costs combined with the increasing demand for affordable housing are driving homeownership further from reach for many.

The housing crisis is exacerbated by a stagnant construction sector, further impacted by surging interest rates. The increase in interest rates acts as a deterrent for potential homebuyers. Indeed, for each percentage point

increase in interest rates, there is a substantial decline in the number of building permits issued.

In addition to the substantial soar in financing costs, construction costs have rapidly increased. Energy and materials, such as gravel and sand, have become more expensive and their prices are likely to rise further. Moreover, employment growth in construction has plateaued, compounding the problem.

With limited options for property acquisition, the rental market is under high pressure, leading to further price climbs. A study by the Hans-Böckler-Stiftung indicates that Germany is short of over 700,000 apartments, particularly in the affordable sector.

The German government's commitment to building 400,000 new homes annually is falling short of this target. Contrary to this promise, which also includes a quarter of social housing units, approximately half of these accommodations have entered the market in recent years.

Moreover, only twenty per cent of the social housing target has been reached, disproportionately burdening low-income households.

This state-subsidised construction of apartments offers a lifeline to those unable to afford market rents. Yet, the neglect of the social housing scheme by German governments has led to a historic low, with just over one million social housing units nationwide. The supply of social housing stands in strong contrast to the eleven million eligible households in Germany.

Refugees Fuelling the Housing Shortage

Amidst the clamour for affordable housing, Ukrainian refugees are ensnared in the housing crisis. Approximately 25 per cent of refugees who arrived in Germany during the 2015/2016 migration crisis still live in state-run shelters. In 2022, over a million Ukrainians entered Germany, with an additional 300,000 asylum seekers expected this year.

This abrupt population increase has put strong pressure on the housing market and contributed to the sharp rise in rents. As many refugees have limited financial resources, they compete for scarce affordable housing units exacerbating the situation for low-income German households.

Seeking Solutions: The Way Forward

As Germany grapples with this housing catastrophe, the government, industry experts, and political figures are seeking solutions. Ideas range from additional tax breaks for construction costs and suspending property sales taxes to offering low-interest rate credit programs for new residential buildings.

Additionally, the expansion of social housing construction together with a tighter rental price cap are hotly debated among decision-makers.

Providing affordable housing is not only feasible, but it is also crucial to address the housing crisis and protect the rights of Germany's residents. As the housing crisis escalates, these policy measures offer a glimmer of hope in the face of a dire situation.

Adequate housing is one of the United Nations' human rights, and Germany's response to this crisis will determine whether it can uphold this fundamental right for its people.

Sources: CNBC, Deutsche Welle (DW), Euronews, Hans-Böckler-Stiftung, Ifo Institute, Reuters, Handelsblatt

Written by Benedikt Hornung

October 2023

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