The German Property Market

[Jacob]

I thought this was interesting: http://www.forbes.com/sites/eamonnfingleton/2014/02/02/in-worlds-best-run-economy-home-prices-just-keep-falling-because-thats-what-home-prices-are-supposed-to-do/

When Americans travel abroad, the culture shocks tend to be unpleasant. Robert Locke's experience was different. In buying a charming if rundown house in the picturesque German town of Goerlitz, he was surprised – very pleasantly – to find city officials second-guessing the deal. The price he had agreed was too high, they said, and in short order they forced the seller to reduce it by nearly one-third. The officials had the seller's number because he had previously promised  to renovate the property and had failed to follow through.

As Locke, a retired historian, points out, the Goerlitz authorities' attitude is a striking illustration of how differently the German economy works. Rather than keep their noses out of the economy, German officials glory in influencing market outcomes. While the Goerlitz authorities are probably exceptional in the degree to which they micromanage house prices, a fundamental principle of German economics is to keep housing costs stable and affordable.

It is hard to quarrel with the results. On figures cited in 2012 by the British housing consultant Colin Wiles, one-bedroom apartments in Berlin were then selling for as little as $55,000, and four-bedroom detached houses in the Rhineland for just $80,000. Broadly equivalent properties in New York City and Silicon Valley were selling for as much as ten times higher.

Although conventional wisdom in the English-speaking world holds that bureaucratic intervention in prices makes for subpar outcomes, the fact is that the German economy is by any standards one of the world's most successful. Just how successful is apparent in, for instance, international trade. At $238 billion in 2012, Germany's current account surplus was the world's largest. On a per-capita basis it was nearly 15 times China's and was achieved while German workers were paid some of the world's highest wages. Meanwhile German GDP growth has been among the highest of major economies in the last ten years and unemployment has been among the lowest.

On Wiles's figures, German house prices in 2012 represented a 10 percent decrease in real terms compared to thirty years ago. That is a particularly astounding performance compared to the UK, where real prices rose by more than 230 percent in the same period. (Wiles's commentaries can be read here and here.)

A key to the story is that German municipal authorities consistently increase housing supply by releasing land for development on a regular basis. The ultimate driver is a  central government policy of providing financial support to municipalities based on an up-to-date and accurate count of the number of residents in each area.

The German system moreover is deliberately structured to encourage renting rather than owning. Tenants enjoy strong rights and, provided they pay their rent, are virtually immune from eviction and even from significant rent increases.

Meanwhile demand for owner occupation is curbed by German regulation. German banks, for instance, are rarely permitted to lend more than 80 percent of the value of a property, thus a would-be home buyer first needs to accumulate a deposit of at least 20 percent. To cap it all, ownership of a home is subject to a serious consumption tax, while landlords are encouraged by favorable tax treatment to maximize the availability of rental properties.

How does all this contribute to Germany's economic growth? Locke, a prominent critic of America's latter-day enthusiasm for doctrinaire free-market solutions and a professor emeritus at the University of Hawaii, notes that a key outcome is that Germany's managed housing market helps smooth the availability of labor. And by virtually eliminating  bubbles, the German system minimizes the sort of misallocation of resources that is more or less unavoidable in the Anglo-American boom-bust cycle. That cycle is exacerbated by tax incentives which encourage citizens to view home ownership as an investment, resulting in much hoarding and underutilization of space.

In the  German system moreover,  house-builders  rarely accumulate the huge large land banks that are such a dangerous distraction for U.S. house-builders like Pulte Homes, D. R. Horton, Lennar, and Toll Brothers. German house-builders just focus on building good-quality homes cheaply, secure in the knowledge that additional land will become available at reasonable cost when needed.

Locke is the co-author, with J.C. Spender, of Confronting Managerialism: How the Business Elite and Their Schools Threw Our Lives Out of Balance, a book I highly recommend.

I'm curious what people here think. I mean, I know that Ide will love it because it's government regulation and it keeps housing cheap; but what about the rest of you?

[The Brain]

Not a huge fan of Socialism.

[garbon]

I don't think.

[Neil]

Sounds interesting.

[Jacob]

Sounds interesting.

Yeah, I thought so too.

[Neil]

Sounds interesting.

Yeah, I thought so too.

I think the article was kind of stupid though.  I didn't like the idea that because the Germans have used the Euro to stabilize their economy and export their inflation to poor countries that we should take all of their ideas on how to organize a society seriously.  But the North American way of treating your house as an asset rather than your home has had some fairly damaging effects, not least to me personally.

[Jacob]

I think the article was kind of stupid though.  I didn't like the idea that because the Germans have used the Euro to stabilize their economy and export their inflation to poor countries that we should take all of their ideas on how to organize a society seriously.  But the North American way of treating your house as an asset rather than your home has had some fairly damaging effects, not least to me personally.

Yeah, I wasn't sold on the whole "the best economy in the world" part, but I did think that the way of managing the housing stock was interesting. I mean, personally, I've got my mortgage so I'd be in trouble if we did an abrupt transition to that sort of system; but it's an interesting approach nonetheless.

[Liep]

After the burst in 2008 that left a lot of people technically insolvent in houses they're still struggling to sell I'm thinking that a lot of Danes would find this interesting too. Surprisingly really that this is the first I've heard of this given the massive crisis that the Danish/anglo way caused, but I guess even considering measures like in Germany would get you booted out of politics quickly.

[Jacob]

After the burst in 2008 that left a lot of people technically insolvent in houses they're still struggling to sell I'm thinking that a lot of Danes would find this interesting too. Surprisingly really that this is the first I've heard of this given the massive crisis that the Danish/anglo way caused, but I guess even considering measures like in Germany would get you booted out of politics quickly.

Yeah, you'd have to contend with all the people whose net worth would decrease due to a drop in property prices. Alternately, you'd have to keep prices steady and wait for inflation to catch up; but I doubt even that would fly.

[Zanza]

A key to the story is that German municipal authorities consistently increase housing supply by releasing land for development on a regular basis.

Happens way too little in cities. Most land is used for either luxury housing or commercial property. Real estate in cities is no longer affordable for middle income households.

The ultimate driver is a  central government policy of providing financial support to municipalities based on an up-to-date and accurate count of the number of residents in each area.

The last census suggests that the authorities overestimated the number of inhabitants by 1.5 million (about 80.5 million instead of 82 million). Ooops.

The German system moreover is deliberately structured to encourage renting rather than owning. Tenants enjoy strong rights and, provided they pay their rent, are virtually immune from eviction and even from significant rent increases.

Yes, but that does not apply when the tenant changes. When the old tenant moves out, huge rent hikes are common.

[Malthus]

It would be interesting to have an economist weigh in. I imagine there are all sorts of unintended effects of such a system that we would not like, but I have no idea what they would be!  Would ot require all sorts of state interference in other areas to be workable?

Also, as mentioned,  it may be impossible to transition from one system to another.

[Valmy]

The last census suggests that the authorities overestimated the number of inhabitants by 1.5 million (about 80.5 million instead of 82 million). Ooops.

Even the famed German attention to detail cannot keep track of the quickly contracting German population.

[Zanza]

Even the famed German attention to detail cannot keep track of the quickly contracting German population.

The gap was mostly foreigners moving away without notifying authorities (about 1.1 of the missing 1.5 million). German authorities will notice a German being absent after a couple of years when they try to send the invitation for the next election. When I moved to Australia during my studies, my mother was called by the city authorities of the town I had lived in before and they wanted to know what happened to me as my invitation for the municipal election couldn't be delivered.

[dps]

Sounds interesting.

Yeah, I thought so too.

I think the article was kind of stupid though.  I didn't like the idea that because the Germans have used the Euro to stabilize their economy and export their inflation to poor countries that we should take all of their ideas on how to organize a society seriously.  But the North American way of treating your house as an asset rather than your home has had some fairly damaging effects, not least to me personally.

Sounds interesting.

Yeah, I thought so too.

I think the article was kind of stupid though.  I didn't like the idea that because the Germans have used the Euro to stabilize their economy and export their inflation to poor countries that we should take all of their ideas on how to organize a society seriously.  But the North American way of treating your house as an asset rather than your home has had some fairly damaging effects, not least to me personally.

But the North American way of treating your house as an asset rather than your home has had some fairly damaging effects, not least to me personally.

Question:  compared to the US, what percentage of Germans and Canadians own their own homes?

[Sheilbh]

Question:  compared to the US, what percentage of Germans and Canadians own their own homes?

Not sure about Canada, but Germany's got the lowest rate of home ownership in the EU at just over 50%. Austria's the only country with a rate nearly as low. I've always wondered why.

The European average is around 70% and the Eurozone average is around two thirds. It's not entirely relevant but Northern Europeans (Scandis and the Dutch) have the lowest rate of outright home ownership and the highest rate of outstanding mortgages.

Edit: David Lammy had this about German policies:

Take, for example, the German system of rent controls. Renters have indefinite tenancies; a tenant can only be evicted for non payment of rent (over a number of months), damage to the property, unauthorised subletting, or to allow the landlord or a member of his or her family to live in the home or to sell the home. It is in the interests of a landlord to retain their current tenant because the costs of letting agents are borne by the landlord.  The initial rent is set by the market, but cannot be more than 20 per cent higher than similar properties in the area. Rents can be raised according to inflation or due to an increase in the landlord's costs, but by no more than 20 per cent in any three-year period.  Further, proper maintenance of the property by the landlord is incentivised; a tenant only pays 100 per cent of the rent if the home is in 100 per cent good condition. Perhaps a system like Germany's is exactly what London needs to address the uncertainty and unaffordability faced by tenants in our private rented sector.

But I wonder if there's something cultural that contributes to Germany, Austria and Switzerland having the lowest home ownership rate in Europe?