All change at Germany's SPD while election battle lines get re-drawn

Germany's left-of-centre SPD, the junior partner in the governing coalition in Berlin with Angela Merkel's CDU/CSU grouping, has been at the forefront of a new drive to dampen Germany's residential housing boom, now entering its seventh year.

The socialist party has a quiver-full of new proposals to enact new housing laws that would promote more affordable housing in Germany's cities, where rising rents and purchase prices are causing a lot of disquiet.

Their plans include further stiffening of the Mietpreisbremse, or rental cap, limiting new residential rent increase to 10% of a local benchmark, and making it more difficult for landlords to give notice to tenants when they require a property for their own or their family's use.

They also (more sensibly) plan to extend the recent reforms whereby "he who engages the broker pays the fee" from the renting of accomodation to the business of buying and selling property – a feature of the market long since accepted in most other countries' property markets. 

In other words, it should be mainly the landlord, or the seller, who pays the broker's commission. The SPD also aims to lower the transactional costs (notary fees, property transfer tax, and land registry charges) that in Germany are four times higher than in the UK, by replacing the current structure with flat fees.

Such moves have form here in Germany, where in the dim and distant past (actually, only about twenty five years ago) the property investment landscape was pock-marked with tax relief schemes, funding instruments and preferential acquisition programmes for companies offering to provide subsidised housing. Naturally, in those days, foreigners took one look at the complexities and intransparencies of the German property market – and promptly ran a mile.

As we report in this issue, the number of building permits issued last year in Germany reached a 21-year high. While developers argue they have plenty of reason to grumble, not since the post-unification building boom – which ended for many in tears – the cranes and bulldozers are working all hours of the day to throw up new housing. And even that isn't sufficient to meet demand, particularly in the big cities, where private enterprise still just about sees sufficient incentive to build with the prospects of some reasonable return.

While the Mietpreisbremse has seemingly proved ineffectual to date, some scare stories have been doing the rounds whereby tenants, once safely ensconced in their new dwellings, have been scrutinising their lease arrangements and claiming back the difference from their landlords of the market rent (which they've been paying) and the maximum permissible rent under the new laws (of which there was no mention while they were merely applying for the apartment).

We don't know how widespread this is, but if unchecked, it could prove a nasty shock for private investors whose yield calculations are based on higher rental income than may be realisable in the long term.

Apart from their designs on the housing market, the Social Democrats are pushing hard for more tax cuts and a softening of finance minister Wolfgang Schäuble's austerity regime in a year where the government needs no new borrowing for the third year in a row, producing a public sector budget surplus of €6.2bn last year.

By any measure it's a remarkably strong performance, all the more so in the light of the biggest refugee surge in two decades, which has robustly failed to put the country off its stride.

In a surprise move this week, long-term SPD leader Sigmar Gabriel stepped down to make way for Martin Schulz, until recently the President of the European Parliament, who will now be the challenger to Angela Merkel in the national elections in September.

While his party is almost certain to be the second-largest faction after Merkel's CDU no matter what happens, there is scope for big change on Germany's political landscape this year.

Schulz clearly has ambitions to lead the SPD back to the lofty heights it last enjoyed under Gerhard Schröder, and to get there fairly quickly. That might mean making housing and the removal of loopholes favouring property investors a key plank of the socialist's election platform.

But one thing looks clear. The far-right AfD party will certainly enter the Bundestag later this year, very likely as the third-strongest grouping. Trump, Brexit, and the forthcoming French, Dutch and even Italian elections will all strengthen the AfD's hand, and while they're not yet a potential coalition partner, their presence at a national level will doubtless influence how many of the other larger and smaller parties will play their hands.

Despite the 'outing' of a very evident Nazi wing in the party, the AfD are riding the wave of right-wing nationalist parties garnering a chunk of the middle-class vote. A lot can happen in nine months, but the party has momentum on its side.

In any event, on a day on which the Dow Jones cracks the 20,000 mark for the first time in its 120-year history, and with even the Footsie unfazed by the prospects of the UK's new diminished status, it looks like it will take more than politics to shake investors out from investing in hard assets, with little to be gained by keeping their money under the pillow or buying (in real terms) zero-yielding bonds.

Germany is still the key continental European market, and for now still represents in our view the best hedge against other – seen or unseen - forms of European turmoil.