Housing subsidies need to become ‘fit for the future‘

Housing subsidies need to become ‘fit for the future‘, particularly given that the number of people dependant on them is on the rise, according to Germany’s Federal Statistical Office this month.

Although ‘Wohngeld’, or housing subsidies, have been increased in recent years, more and more people have claimed them in recent years, according to a study published this month by the Cologne Institute for Economic Research (IW).

Last year, more than 600,000 low-income households in Germany received housing subsidies to the tune of around €150 a month, equating to €1.2b across the country. This represented a significant jump on the previous year, where, around 460,000 households received subsidies of €120 a month.

However, that could be set to change, according to Dr. Ralph Henger, a senior economist at the IW, who forecasts that ‘Wohngeld’ could actually decrease by 6% a year up until 2022: ‘There are a couple of main reasons for this,’ he told REFIRE. ‘Firstly, some people grow out of the system, earn more money and don’t need subsidies anymore. Other households move into Harz IV (Germany’s welfare system) and have their subsidies paid out of that system instead.’

One thing is clear, according to Henger: both housing subsidy systems need to change. ‘There is a big discrepancy at the moment in terms of when they are adjusted,’ he said. ‘Wohngeld is adjusted every two years yet Harz IV is adjusted every year. I hope that the new coalition government brings them more into sync.’

And while Germany was largely immune to the peaks and the troughs that were par for the course for other European residential markets in the years leading up to the last financial crisis, the country has been hard hit in the past decade by rents that are rising more quickly than wages in many parts of the country. In a bid to bring rents down to acceptable levels, the German government introduced the Mietpreisbremse, or rental price brake law, in 2015. Under the terms of the law, Germany’s federal states could impose rental caps on residential markets, freezing them at 10% above an agreed ‘rent table’, or Mietspiegel, or an acceptable average price for a neighbourhood. In practice, the law simply exacerbated the problem and has failed to protect those most in need of affordable housing.

Germany’s rental market is of particulars cause for concern because of its sheer size relative to its European counterparts: almost 49% of Germans live in rented accommodation, according to Eurostat, far above the European average of just over 30%.

And rents are showing no signs of slowing: new rental leases for apartments across Germany have pushed up rents by 4.4% y-on-y in the first six months of 2017 to €7.90 per sqm for the basic net rent, according to data published by the Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR) in August. Cities with more than 500,000 inhabitants benefitted most from the increases, averaging upticks of 5.6% to €10.39 per sqm for both new and existing tenants. Large cities with fewer than 500,000 inhabitants witnessed smaller than average increases of 4%, or an average of €7.55 per sqm. Last year, new rental leases increased on average by 4.9% y-on-y to €7.65 per sqm, according to the BBSR.

In some cities, rent hikes have been even more dramatic. In Berlin, the average rent for an 80 sqm apartment rose by 40% between 2007 and 2016 to €634 per month. In Munich, rents jumped by 21% to €1,032 per month in the period. As a result, some people are being forced to spend more than 40% of their salary on rent.

However, without ‘Wohngeld’, this figure could be even higher, Henger stressed. ‘Rents have been rising in Germany and without subsidies, some people would end up paying more than 40% of their income in rent. We also estimate that an additional 600,000 German households aren’t claiming subsidies when they could be, either because they don’t want to be stigmatized or because they’re not aware that help is out there. The Mietpreisbremse hasn’t worked and in many cities actual rents are still higher than the Mietpreisbremse suggests they should be. It’s hard to say what will happen after 2022 but we hope that reforms will help the market to level out.’