The IW cites various reasons why home ownership remain so low in Germany
Professor Dr. Michael Voigtländer and his team at the prestigious Institut der deutschen Wirtschaft in Cologne (IW Köln) are among the most prolific researchers in Germany on matters financial and real estate-related. They don't shy away from presenting unpalatable facts. And yet Dr. Voigtländer nearly always manages to find a silver lining on every cloud, a sort of spoonful of sugar to help make the nasty medicine go down.
Professor Dr. Michael Voigtländer, IW Köln
This time his latest study demonstrates how home ownership in Germany is now relatively more affordable than it was a few decades ago. Given the pain being experienced by those who were preparing to buy, before the shock interest rate rises of the past two years put paid to their plans, it is worth remembering how things actually were years ago, when interest rates were indeed much higher than they are today.
Voigtländer and his team show that owner-occupied housing was indeed by no means cheaper, but actually more expensive than now. This is confirmed by the IW's new affordability index. It combines Germany data from the OECD for three developments: house prices, income and long-term interest rates, which are relevant for property mortgages. The index starts in 1980 with a value of 100 and comes up with some surprising findings.
The IW affordability index reached its highest level to date with a value of 115.5 in the third quarter of 1981; in the fourth quarter of 2023, it stood at just 39.8.
This means that the index is now a long way from its all-time high and still surprisingly close to its low of just under 29, which it reached in the third quarter of 2016.
Several factors have been decisive for the development of the index over the decades:
Firstly, interest rates have fallen massively since the 1980s and are currently a long way from their peak in 1981. At that time, they were 10.6% for a full repayment loan with a term of 20 years; in the fourth quarter of 2023, this interest rate was around 4%.
Secondly, construction activity was too high in the 1990s and there was an oversupply on the property market, which depressed prices.
Thirdly, incomes have risen faster than prices in some cases in recent decades, which has also caused the index to fall.
However, as Dr. Voigtländer points out, there was still a big discrepancy between what people could have afforded in terms of property and what they actually realised.
Low home ownership rate
Why does home ownership remain so low in Germany? The IW cites various reasons for this, a number of which might not be immediately obvious:
Own contribution. In the past, when there was less complex technology and laxer building regulations, house builders were able to lend a hand much more than today. This naturally has an impact on the cost of a home.
Nowadays, young people spend much longer in education than in the past and families are started later. This shortens the period in which loans for houses or flats can be repaid, which increases the monthly instalments to be paid.
Additional expenses such as land transfer tax (Grunderwerbsteuer) or estate agent and notary costs cannot usually be financed with a loan, but increase proportionally with the purchase price. In addition, most federal states have increased the land transfer tax rates, in some cases to 6.5%, as in North Rhine-Westphalia or Schleswig-Holstein. Only a few households have sufficient equity to be able to afford the sum of the ancillary purchase costs.
Interest rates: At the current margin, the interest rate hikes implemented by the European Central Bank, among other things, have led to a rise in the IW affordability index and, objectively speaking, fewer people can afford a residential property again.
This is also shown by another calculation method that looks at the costs that are due for monthly loan instalments. For example, in the first half of 2018, a household had to commit a good 27% of its income to finance an average owner-occupied property; in the first half of 2023, this figure was more than 41%.
Recommendations
Among the recommendations the IW research team is putting to policymakers to approve the investment climate are:
Subordinated loans. Such loans, which are only ranked in second place in priority in the land register, could be provided by the state-owned KfW Bank. Families looking to build could use these loans as an equity substitute. And thanks to the subordination, the financing risk for the house bank would not increase.
Reduced property transfer tax: For example, if the federal states waived at least part of the tax by means of allowances, the equity required to buy or build a house would be reduced, making financing more favourable overall.
Designate building land: Favourable land prices can depress house or flat prices. Only with enough land can owner-occupiers become builders.
As Dr. Voigtländer concludes, converting more people into owners again has further socio-political implications: In recent years, an average of around 250,000 tenants per year have become homeowners. If these people stay in rented accommodation instead, the rental housing market is put under additional pressure - which in turn drives up new contract rents.
Germany remains a nation of renters
For all the matter about affordability, the fact is that Germany essentially remains a nation of renters. This was underlined by a recent survey by estate agency network REMAX, the European Residential Property Trend Report 2023. The brokers surveyed 23,000 people in 23 European countries and regions in July last year, with 1024 of them coming from Germany.
Notable from the survey is how Germans' willingness to buy has fallen heavily since as recently as 2022, ensuring that Germany remains at the bottom of the list of European home-owners, apart from Switzerland.
A comparison of the responses shows that the buying climate in Germany deteriorated significantly in 2023. Only 11.8% of respondents said they wanted to buy a property in the next two years - compared to 25.6% in 2022. This compares unfavourably with other countries: one in five other continental Europeans (20.8%) are planning to buy a property, says the survey.
For years Germany has collectively preferred the rental model. About 57% of households rent their accomodation, with owner-occupiers making up only 41.2% - a large number of those being in smaller towns and rural areas. In southern and eastern European countries, on the other hand, the home ownership rate is over 70%. The European leader is Greece with a share of 84.1%, followed by Italy at 83.4%.
Samina Julevic, recently-appointed CEO at REMAX Germany, says: "Despite historically low interest rates, falling purchase prices, more properties and good negotiating opportunities, Germans have not yet taken advantage of the opportunities on the property market."
Particularly hard-hit are the age-group 36-45, of whom 40% say they would now struggle to buy any suitable property. Affordability is less of an issue in the age- group 56-65, with 29% saying they would have a real problem with affordability. For, despite reports of a flight to the suburbs, 43% of prospctive buyers still would prefer to buy in the city, 35% in the suburbs and only 22% out in rural regions.
By not buying property, prospective buyers remain tenants - reducing the rental supply and helping to push up the rents themselves. Rents rose last year by 4% for existing properties and 6% for new-builds, with the increases on new leases being even higher in the biggest cities, at 6% and 9% respectively, according to BNP Paribas Real Estate
The structure of German society makes the problem even more acute: Germany has a 29.4% share of single households, surpassed in Europe only by the Finns, at 38.4%.
