Klara Geywitz, Federal Minister for Housing, Urban Development and Building
Against a worsening German housing background, Germany's Federal Construction Minister Klara Geywitz announced plans to significantly increase tax depreciation options on the construction of new buildings.
Her calls for the use of new tax incentives comes against a background of a stalled housing construction sector, amid the sharp rise in interest rates and the cost of building materials.
The government has fallen far short of its target of 400,000 new homes built per year, and will be lucky if half that number are built this year and next. The number of new building permits issued for housing have also slumped, presaging bad omens for the number of new completions two, three, and even four years out.
What Geywitz is specifically proposing is the introduction of a temporary 'degressive AfA' for new residential buildings from 2024. (AfA, or 'Absetzung für Abnutzung', is an allowable depreciation for 'wear and tear' on a building.) The new lower rate would apply until the end of 2030, which should provide an incentive to push through building projects quickly.
A declining-balance depreciation would allow for higher depreciation for building owners in the near future. It would work like this: in the year of completion and in each of the following three years, 7% of the construction costs can be depreciated, instead of the currently permissible 3%. Over the following four years, it would be 5%, and 2% in the 26 years after that.
Geywitz said her proposals for the new degressive AfA better reflects the reality facing developers. With the rapid rate of obsolescence of technology installed in new buildings, meaning the technology is often outdated within a few years, she said, "As a result, buildings lose value more quickly at the beginning because they lose their status as state-of-the-art buildings relatively quickly."
The immediate reaction from the real estate industry was positive, with most observers crediting Geywitz for dovetailing cleverly with finance minister Christian Lindner planned Growth Opportunities Act, which plans to ease the burden on the economy with a €6.5 billion annual tax package, designed to provide tax incentives for companies that invest in better energy efficiency.
Andreas Mattner, president of the industry lobby group ZIA, said: "This initiative could provide precisely the impetus needed to revive the flagging residential construction sector." He added, "The key here is to cut back the state-induced costs on the housing asset from its current 37% - for example, by suspending the real estate transfer tax for rental apartments as well, or abandoning municipal skimming models for project development."
Axel Gedaschko, president of the German Housing Association (GdW), said: "We welcome this urgently needed step to revive new construction in Germany." However, in view of the "dramatic overall situation", additional measures are needed, he added.
Many housing companies simply do not have enough money to build, said Gedaschko. "An equivalent investment allowance must be made possible for these companies." In addition, he said, a special depreciation allowance is needed for those companies that guarantee affordable rents.
Felix Pakleppa, chief executive of the ZDB construction association, also welcomed the move and also called for further aid such as a suspension of the land transfer tax.
There's no guarantee that Geywitz's proposals will be passed. Lindner's party, the Free Democrats, cautioned that Geywitz still had to get agreement with the Cabinet and Lindner's finance ministry for the financing, which would initially mean tax revenue shortfalls in the billions. And with affordable housing being the social issue of the day, approval from more than just the finance ministry is likely to be needed. Geywitz will need to appeal to a variety of power sources. "But if the German economy is to get back on a growth path, this can only happen if we have a strong construction sector," she said.
Geywitz says her proposals go beyond previous measures, such as the increase in linear depreciation options and the reintroduction of special depreciation, which were were not enough in themselves "to create sufficient investment for the urgently needed new housing."
Geywitz's plans are not aimed at people who want to build the classic single-family home. That's what the owner-occupied housing subsidy is for, for which the government's Budget Committee recently released additional funding. The depreciation options primarily benefit those who generate income from their properties by renting or leasing them out.
Last year, the coalition government and the CDU/CSU had already started tightening the AfA screws, with the Annual Tax Act 2022 allowing linear depreciation increase from 2% to 3% at the beginning of this year.
Additionally, a special depreciation rate of 5% was introduced for the first four years if the new apartments are built to the KfW Efficiency House 40 standard - although a quality seal for sustainable buildings is also required along with a construction cost ceiling of €4800 per square meter. These are "demanding conditions," writes the Ministry of Construction.
Demand for private building loans has slumped since spring 2022, with German banks' new lending business shrinking by 50% year on year, the worst half-year performance since 2005. One bright shimmer of hope is the fall in the rate of growth of building and material prices, which rose by 16-18% last year. As we report elsewhere in this issue, these prices were now headed back in line with general inflation, in particular in building services.
