Baukindergeld could put countryside back on the map

Germany has been fighting a two-tier housing system in recent years, with rapidly rising prices in the ‘Big 7’, against a backdrop of falling prices in rural communities as more and more people flock to big cities. However, with the introduction of Baukindergeld this year, all that could be about to change, according to ProfessorMarco Wölfle, director of the Center for Real Estate Studies (CRES) und VWA Business School in Freiburg.

‘There has been a tendency for people to move away from the countryside to big cities in recent years,’ he told REFIRE. ‘However, Baukindergeldcould reverse that trend, given that the subsidy is the same wherever you live and prices in the countryside are a lot cheaper. This could result in people moving back to rural areas.’

Ultimately, the subsidy is designed to benefit rural areas the most, Dr. Konstantin Kortmann, head of residential investment Germany at JLL in Frankfurt, told REFIRE: ‘It will have a significant impact on the countryside,’ he said. ‘We could see more people move out there as a result, which will push up prices. The advantage of the Baukindergeldis much higher for cheaper homes, which is partly the government’s intention.’

Since Germany formed a GroKo coalition in February,the CDU and SPD have introduced several proposals to boost the country’s housing market, including the introduction of Baukindergeld, a subsidy for parents to help them buy a home, which applies retroactively from January this year.

The subsidy will be awarded to the tune of €1,200 per child per year for up to 10 years. The subsidies are available to couples whose taxable joint income does not exceed €90,000, if they have one child, which rises to €105,000 for two children and €120,000 for three children,Wölfle said.

While no limit has been set as to how large a home can be, there are some constraints. While these subsidies do not have to be repaid, they only apply to those buying their first home. Existing homeowners are not eligible. In addition, children must still live at home and be under the age of 18.

Politicians have hotly debated how the Baukindergeld plan should be rolled out. Many politicians, including Bavarian prime minister Markus Söder, have rejected calls for limiting the size of the home, saying that families in rural areas, where homes tend to be larger and more affordable, would be penalized.

So what will the subsidies mean for Germany’s housing market going forward? According to a study carried out by the Center for Real Estate Studies (CRES) and the IVD, Baukindergeld could have a substantial impact on young families buying their own home, resulting in savings of between 5% and 63% in cities such as Berlin, Hamburg, Leipzig, Nürnberg and Krefeld, depending on the location. Even taking into account regional prices differences, the subsidies will make homes affordable for many households, according to IVD president Jürgen Michael Schick.

Around 200,000 households a year will be eligible for the subsidies, according to the German government. Wölfle estimates that around 2.5m households will be eligible in total. The scheme is expected to cost the government between €4b and €6b during the first three years, according to the CRES.

However, there are challenges ahead, Kortmann warned: ‘In bigger cities, it will put prices up, particularly if competition for homes increases. As such, the Baukindergeld will effectively subsidize a pretty big part of the market but in tense markets it won’t help the people it is trying to support if homes get too expensive. I personally don’t really like the Baukindergeldas a concept. I am all for giving help to young families but I don’t think this is the best way. It’s barely better than the Mietpreisbremse. However, it will increase home ownership rates, which is a good thing.’

People in states such as Saarland and Rheinland-Pfalz, as well as Eastern Germany, will profit the most, according toWölfle, because there house prices are the lowest. The subsidies may help to tackle the overbuild in rural areas, where supply continues to outpace demand, driving down prices. Between 2011 and 2015, around 20% of homes built in German rural districts were surplus to demand, according to the German Economic Institute (IW) in Cologne. Single-home properties were overbuilt to twice the degree. In Emsland, for example, more than 1,000 apartments built in the period were surplus to requirements.

Before the introduction of Baukindergeld, it was estimated that prices for apartments would fall by more than 25% in a third of rural areas by 2030, according to the DIW Berlin (the German Institute for Economic Research). The price of single family home and duplexes was expected to fall by more than 25% in around 100 of Germany’s 402 rural districts and municipalities. Areas that were expected to be particularly badly hit include Brandenburg, Sachsen, Sachsen-Anhalt and Mecklenburg-Vorpommern, according to the DIW. Now, those price corrections may not come to fruition.

However, Wölfle does not expect Baukindergeld to have a big impact on the housing development pipeline, despite Germany’s housing shortage: ‘The main problem is that there is so little land upon which to build in many cities and that is dampening development,’ he said. (ssk)