As home ownership rates fall, ‘thousands of households will slip into a pension gap’

Germany has always had a lower level of home ownership than many of its European counterparts but in recent years, that had started to change. However, as crippling inflation and high interest rates effectively put pay to many people’s dream of owning their own home, industry bodies are calling for urgent action.

The ifs and Housing Policy Forum of the German Association for Housing, Urban and Regional Planning (DV) in Berlin earlier this month called for the federal government's home ownership policy to be strengthened, including the launch of a new "Young buys Old" program for the purchase of existing properties. The task now is to provide this with sufficient funding and make it manageable for potential buyers so that it can have a broad impact.

‘The promotion of home ownership is part of a holistic housing policy that ultimately benefits society as a whole,’ said Michael Groschek, president of the DV and former Construction Minister of North Rhine-Westphalia. He presented the DV’s demand and the partners of the ifs for a cross-departmental funding strategy of the federal government for home ownership, focusing in particular on the challenges of the younger generation in home ownership and include the existing housing stock.

Predictably, cheaper properties are garnering the most attention. Currently, residential properties listed on ImmoScout24 for between €250,000 and €550,000 are much more in demand than higher-priced properties. Across Germany, the share of demand in this category has grown by 6% to 29%. In the metropolitan areas, it rose by 7% points to 34%. The less expensive properties are now most in demand in the major cities.

One million fewer people have bought homes in past decade

In Germany, wealth is unevenly distributed compared to other European countries, which is also due to the low home ownership rate. According to the DV, one million fewer households have made the leap into home ownership than in the previous decade, even in the low interest rate phase. Younger people currently have hardly any prospects of becoming homeowners, although many of them would like to do so. In terms of intergenerational equity, this is a worrying trend because the home ownership rate has a positive effect on a balanced distribution of wealth.

Subsequently, a lot needs to change, as Oda Scheibelhuber, chairwoman of the ifs Institut Wohneigentum in the DV notes: ‘Unfortunately, the socio-political importance of home ownership for broad sections of society is hardly reflected in the housing policy,’ she said. ‘Only €350 million are now explicitly earmarked in the federal budget for promoting home ownership for families.’

The home ownership rate is dropping particularly sharply among younger age groups, from 32% to 26% in the last ten years among the 25 to 44 age group, according to the DV. In addition, the current turnaround in interest rates and exploding construction costs with high property prices are making it impossible for families with average incomes in many places to fulfil their dream of owning their own home: ‘We should recognize how suitable home ownership is for making life more predictable and ensuring intergenerational equity,’ warned Scheibelhuber.

Home ownership is more common in Eastern Europe than Western Europe. In countries like Kosovo (97.8%), Albania (96.3%) and Romania (95.3%) it’s above 95%. Germany (49.1%) and Switzerland (42.2%) have by far the lowest rate of home ownership in Europe, due to the high cost of housing. This is far lower than in Italy (74.3%), France (63.4%), Spain (76%) and the UK (65.2%), according to Trading Economics.

Another factor that affects home ownership rates is the prevalence of social housing. In countries where social housing is common, such as Germany, the Netherlands and Austria, renters are more likely to be housed in publicly-owned properties. When Germans buy, they are typically around 40 years old. Only one in four people in Germany live in their own home by the age of 40. In France, this figure is already one in two, and in Lithuania it is as high as 85%, according to Or Cohen Raviv and Thomas Hinz from the University of Konstanz. If you lower the age limit to 34, the trend becomes even more marked: not even one in five people own their own home. And the number is falling, according to the Cologne Institute for Economic Research (IW). Thirty years ago, just under 30% of Germans under 35 lived in their own home.

New subsidy for new builds and ‘Young Buys Old’ scheme designed to boost market

According to Annett Jura, head of department at the Federal Ministry of Housing, Urban Development and Construction, the federal government launched a home ownership promotion scheme this summer, "Home Ownership for Families". Currently, it provides a subsidy limited to new builds with above-legal energy and sustainability standards. The government now plans to launch a further program to promote the purchase of existing properties under the motto "Young buys Old". At the same time, the new program would link up with the Federal Subsidy for Efficient Buildings (BEG) to bring the houses up to a better energy standard within a certain period of time after purchase. In this way, home ownership and climate protection could be combined. According to Jura, the framework conditions, especially the renovation requirements, will be designed in such a way that no one is overburdened.

Nonetheless, recent figures are worrying. As REFIRE recently showed, data from the Federal Statistics Office revealed that the number of building permits granted for apartments collapsed by 27% over the first half of the year. In total, the authorities granted building permits for 135,200 new apartments, 50,600 fewer than a year ago. The figure for June alone was 28.5% down on the same month last year. The Statistics Office put the plunge in the figures down to higher building costs and deteriorating financing conditions. The half-year haul was described as ‘an incredibly bleak picture in residential construction’ by Tim-Oliver Müller, the head of the German Construction Industry Federation.

Klara Geywitz, the Federal Minister for Housing, Urban Development and Construction, has admitted that the figures ‘bother’ her, saying in an interview with Spiegel: ‘The danger is that construction capacity will be reduced, as it was during the last major construction crisis from 1997 onwards.’

The half-year figure was even more extreme for the issue of building permits for single family homes, down 35.4%, and dual-family homes, down a whopping 53.4%. It's becoming evident that even the token new subsidy measures introduced by the government from March 2023 to promote climate-friendly new construction are having little or no effect on the figures.

Return to low interest rates ‘not to be expected in the foreseeable future’

One small glimmer of hope is that building loan interest rates have also not risen since the spring. ‘We assume that interest rates have peaked following the ECB's latest decision. Mortgage rates are increasingly settling in a corridor between 3.75% and 4%,’ said Mirjam Mohr, head of private customer business at mortgage broker Interhyp. ‘We expect building rates to move sideways until the end of the year.’ Whether things will become even more favourable after that depends less on key interest rates than on the development of Pfandbrief yields, which are based on German government bonds. ‘Long-term interest rates of around 1.5%, as was the case two years ago, are not to be expected in the foreseeable future,’ said Michael Neumann, CEO of Dr. Klein Privatkunden AG, a broker of building loans.

However, as the European Central Bank raises rates in a bid to combat inflation, higher lending costs are squeezing would-be buyers in a market where supply is already tight and the government continues to miss its target of building 400,000 new homes a year. Subsequently, purchase prices have fallen dramatically by 7% by the middle of this year, compared to an increase of 7.5% last year, according to JLL. However, some cities are being hit harder – prices in Cologne have fallen by 8.7% in the past year, or by 10.4% since the third quarter of 2022, according to ImmoScout24.

The real question is: does Germany need to play catch up? Should more people be trying to get on the housing ladder? It’s a difficult question to answer but one thing is clear: more and more people are heading towards retirement without the safety net of having a home they can sell if times become tight. As Jürgen Michael Schick, honorary president of the real estate association IVD warns: ‘Thousands of households will slip into a pension gap when they retire because we have made it difficult for them to acquire property over the years. Politicians have failed here.’