Louder calls for radical overhaul of German planning and approval process

The issue of Germany’s housing shortage in the country’s largest cities was much discussed at the recent annual Handelsblatt Immobilientagung in Hamburg. Delegates were unanimous that only a broader building programme had any hope of providing a long-term solution – but there was a wide diversity of opinion as to how this could be effectively achieved.

Encapsulating the dilemma was the presentation of Ulrich Kelber, the parliamentary secretary of state at the Justice Ministry in Berlin. While declaring that only sufficient new construction could alleviate the problem, he defended the new planned measures by his government to tighten up the tenancy laws. These will integrate average rents over the past EIGHT years, instead of the existing FOUR years, for the purpose of determining a rent table (“Mietspiegel”), or benchmark for acceptable rents within a neighbourhood, to fix by law the maximum rent chargeable by landlords.

Rents in cities such as Berlin and Munich rose by an average of 8% last year, flowing steady rises over the past five years. Backdating average rents to eight years will have the inevitable effect of arriving at a lower average rent figure for the purpose of calculating new rents – an obvious disincentive to builders, already constrained by rising building costs, bureaucratic delays and the imposition of burdensome and partly unrecoverable energy-saving regulations.

Michael Hüther, a director at the Cologne-based think-tank IW Institut der deutschen Wirtschaft warned delegates that demographic prognoses underpinning projections for housing demand were now outdated since the taking of the last census. He estimates that the population in Germany will rise from its currentl 81.9m to 83.9m by 2021, based on high net immigration and an accelerating birthrate. Only from 2028 onwards will the population stabilize, leaving us in 20 years with still 1.2m more inhabitants than today.

Estimates for new annual housing demand range from 310,000 units to 500,000 units, with most politicians accepting a figure of 400,000 new-built units yearly. Last year saw 309,000 building permits issued, which would only come on stream – assuming all of them were built – in two years at the earliest. Only a third of these approvals were for Germany’s biggest cities – suggesting a misallocation of resources.

Axel Gedaschko, the head of the influential GdW Bundesverband deutscher Wohnungsunternehmen, a lobbying association for property owners, said the entire planning process needs to be speeded up – “Far too much time is being wasted on over-long and planning-issuing processes”, he said. The entire planning process needs to be radically overhauled, he said, citing the example of the Netherlands where this had been largely achieved.

His views were echoed by Jacopo Mingazzini, head of Berlin property privatization specialist Accentro. Thanks to hollowed-out and over-stretched local planning authorities, it can take up to ten years for a planning application to receive approval, he said. Politicians were often ducking their responsibilities by hiding behind citizens’ initiatives, he added.

Rolf Buch, the CEO of Germany and Europe’s biggest housing company Vonovia, said that the building process itself needed to be accelerated. Expanding on a theme proposed in various different forums by Mr. Gedaschko of the GdW, Buch envisages ‘serial building’ of housing as a means to an end, much as cars are produced on an assembly line, based on a single reproducible model. Vonovia is launching the first prototypes in January next year in Bochum, he said, with two serial residential housing blocks with 60 apartments.

Such serially-produced housing blocks should be granted a ‘model permit’ allowing them to be reproduced elsewhere, much as the German licensing authority for car manufacturing approves a model type, which can than be reproduced in large numbers nationwide. The problem, highlighted Buch, is that not even in Germany’s federal states is there unity among building regulators, rendering such an idea still largely utopian.

Gedaschko of the GdW has been a vocal proponent of a major overhaul of the German planning system. At the Association’s recent annual general presentation of statistics, Gedaschko again pointed to the yawning housing gap in the larger cities, pointing to the difference between permits granted and actual building. Last year saw 248,000 new apartments actually built, a mere 1% more than in the previous year and “miles away from what is actually needed”, he said.

Most alarming is that in some big cities the number of building permits have actually sunk, in some places by up to 50% versus the last quarter of 2015, he said. Then, many builders were rushing to take advantage of the Energieeinsparverordnung (EnEV) 2014, a special subsidy which ran out at the end of last year. He therefore expects the fall to prove widespread throughout this year.

The GdW has about 3,000 public or co-operative housing associations as members, who between them own 6m apartments and house 13m tenants. Rent increases across their holdings averaged 1.6% last year, although the big cities saw higher increases. This was slightly less than the average 2.3% increase seen in 2014.

GdW members invested 14bn in upgrades last year, mainly in energy-efficiency measures, up from €12bn in 2014. Gedaschko said these (largely forced by the government) improvements were leading to increased resistance from tenants, who feared disproportionate rent increases. Demands for investment as a result of the new regulations “are simply excessive” he said.

Lack of approved building land, inflexible standards, rising land transfer taxes and much too long planning and approval process are blocking the path to the unplugging of the bottleneck, said Gedaschko. Germany must adopt the Netherlands practice of serial building and simplifying the approval of similarly-built housing, with a national authority responsible for issuing approvals, he said. “There they’re now building at very different prices and much faster than we are. We need to look carefully at how they’ve managed to do that.”

Meanwhile, also weighing in on the debate as to how to ease Germany’s housing shortage is the the International Monetary Fund (IMF). In a recent note it said Germany should lower the effective real estate transfer tax rate on newly-built housing to help strengthen supply.

Germany’s 16 federal states have been free to set the real estate transaction tax rate (Grunderwerbsteuer) since 2007, the Fund noted in its 2016 Article IV consultation report for the country. Since then, rates have increased from 3.5% in 2006 to up to 6.5% now. In addition, land may be taxed multiple times before new construction is completed, which creates distortions and increases the effective tax rate.

The report said that the German authorities could consider "a VAT-like system for land transfer taxation in the case of new construction so as to avoid double taxation of land and make new construction more financially attractive." To further improve the efficiency of real estate taxation, the authorities could also tax properties more heavily than transactions, the IMF said, adding that an update of property value assessments is long overdue.