Lessons from the German Coalition

Recently, Red Brick has reported on New York, London and Scotland. Now it’s time to look at what has been happening in Germany.

After the Federal Elections two months ago, no one Party commanded a majority in the Bundestag. Angela Merkel’s Conservative Party, the Christian Democrats (CDU/CSU), took 41% of the vote, the centre left SPD took 26%, the Greens 8% and the Left Party 9%. Merkel’s former Coalition partners, the FDP, failed to achieve the 5% necessary to take Parliamentary seats – making a new Coalition necessary. Following long negotiations, the CDU and the SDP have agreed a ‘grand coalition’ of the two biggest parties, which will have a huge majority.  The future policy of the country has therefore been decided in the agreement between the two.

The agreement is built around the main priorities of the two parties. The CDU won a commitment to no tax increases and no increase in national (Federal) debt. The SDP won key demands for a national minimum wage, Germany’s first, set 8.50 Euros, and a reduction in the retirement age to 63 years for those who have contributed to pensions for 45 years.

Housing doesn’t appear in the media headlines about the deal but there has been a significant agreement on controlling rents. Germany has the highest proportion of renters in the EU, and there is a tradition of long-term investment in property ownership for renting as well as a history of controls over the rate of rent increases (including strong laws against ‘usury’). Major strains have appeared in the housing market in recent years, with growing shortages especially in the main cities leading to strong pressure on rents. In Berlin, where there have been rapid rent increases, the Senate has recently agreed a law – The Law on the Prohibition of Misuse of Housing (now there’s an idea!) – banning the renting out of apartments to short-term visitors to protect local people from growing tourist demand.

The new Coalition’s package for affordable housing includes tax incentives for residential development and new legislation to allow local senates to cap rents in areas facing large increases. Rents on new homes will not be allowed to be more than 10% higher than the local average and local government will be able to cap increases on existing homes to 15% over 4 years. Designed to protect low and middle income tenants from exploitation, critics have argued that it will do little to stop the escalating gentrification of more desirable neighbourhoods – which is now similar to that which we have experienced in London and some other UK cities.

It is intriguing to think how the CDU/SPD policy could be applied in the UK, where there is a presumption that rent control of any kind will choke off investment. There is a strong collective memory that rent control led to the withering away of the private rented sector. Of course it was more complex than that, and high levels of subsidy to the other main tenures – home ownership and social renting – also had a lot to do with it. But the truth is that no-one really knows what would happen in the current UK housing market if rents were controlled. There is certainly some usury involved at present, but most landlords with heavy mortgages are not making an excessive rate of return on their investment even though rents are incredibly high – because the high value of property is the underpinning problem. Arguing for an entirely new system of rent setting across the whole sector could well scare the horses, so new policies to restrict the rate of rent increases seems to have more potential.

The debate has therefore settled on different forms of ‘rent stabilisation’, as in the recent reports from the London Assembly and Shelter, and as advocated by Jack Dromey when he was Housing shadow minister. Allied to longer tenancies plus licensing and greater enforcement, plus tough regulation of agents, it means there is a workable package.

Any form of rent regulation is likely to be opposed by the Tories, as happened on the London Assembly, unless David Cameron makes another major U turn. If Labour goes into the Election with rent regulation as a central feature of a comprehensive package to control the cost of living it would help to put the Tories on the back foot.

And Labour could claim it is just following the policy of Europe’s most successful Conservative, Mrs Angela Merkel.

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3 Responses to Lessons from the German Coalition

  1. Pingback: We all agree something must be done about rents | Red Brick

  2. Pingback: Germany’s housing struggles – familiar challenges, interesting solutions | Red Brick

  3. Pingback: In search of requisite variety: central banks and property bubbles | A Fistful Of Euros

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