All posts tagged: Germany
During a recent Andrew Marr show interview, George Osborne justified his determination to change England’s planning rules by referring to the speed and efficiency of the German planning system (“…it takes a third of the time to build a warehouse in Germany than it does in Britain”).
I’ve written previously about the sense and stability of the German housing market, (a reduction on real house prices of 10 percent over the past thirty years), but in the ongoing debate about the need to regulate our private rented sector it’s also worth comparing the German system to ours. Whichever way you look at it, we come off worse.
Germany’s PRS differs from ours in several significant ways but to begin with the level of regulation is greater. Although rents vary across the country they are generally lower than ours and reflective of house prices. A landlord cannot increase the rent by more than 20 percent in a three-year period and tenants have a high level of security. Leases usually have no end point and landlords can only evict if there has been a serious breach of the contract. To reclaim the property for any other reason they would need to prove a ‘legitimate interest’, for example they would have to provide credible proof that they or a close family member wanted to move in. Where properties are sold, sitting tenants retain their protection. This level of security allows stable communities to develop, in contrast to the “churn” that our sector experiences, with all its attendant neighbourhood and management problems.
Most PRS properties in Germany are owned by small landlords and they are charged a lower rate of tax on rental income and can depreciate their investment. The German PRS comprises almost 50 percent of all housing stock, rising to 90% in Berlin (a function of reunification). So Germans see private renting as a safe and reliable form of tenure and they are not desperate to become owners - partly because house prices have declined over the long term and partly because ownership is taxed as an item of consumption. As I’ve said before, this reduction in house prices is mainly a result of making more land available for housing development – more than twice as much as we do pro rata. So the Germans have managed the trick of having falling house prices and a stable, secure and attractive regulated private sector. Is there any reason why we can’t do the same?
The issue of fixed term tenancies is interesting. In the UK, many landlords are forced to grant assured shortholds because their lenders insist on it. Yet many landlords would love to let for longer terms and enjoy the benefits of lower rates of churn.
Property expert David Lawrenson told me;
“The trouble is most buy to let lenders do not currently allow their landlord borrowers to issue Assured Shorthold Tenancies with fixed terms over 12 months…actually there is no good reason from the lenders point of view why such a restriction is in place. Indeed, up to 7 year fixed term ASTs are possible.
Also, many buy to let mortgages still contain terms and conditions that do not allow landlords to let to people who are on benefits whilst other lenders do not allow their landlord borrowers to let under long lease schemes to housing associations and local authorities. Both restrictions also make little sense from the lenders point of view, because where a private landlord is investing up to 25% of the equity, the lenders risk in a repossession situation will be very small.”
As the PRS grows, the issues of regulation and longer-term security will become a hotter topic for policy makers. Ken Livingstone is making limited regulation a key element in his re-election campaign. The Association of Residential Letting Agents also favours regulation as a way of driving up standards and driving out the cowboys. What’s more, a simple local authority licensing scheme would be self-funding and cost the taxpayer nothing -selective licensing of HMOs is already working well in some cities. In seeking to improve the image and reputation of our private rented sector we could do worse than study the German system.
Do you fancy a one-bed apartment in Berlin for £35,000 or a four- bed detached house in the Rhineland for £51,000?
In many parts of Germany house prices are a fraction of their UK equivalents – in fact, German house prices have decreased in real terms by 10 percent over the past thirty years, whereas UK house prices have increased by a staggering 233 percent in real terms over the same period. Yet German salaries are equal to or higher than ours. As a consequence Germans have more cash to spend on consumer goods and a higher standard of living, and they save twice as much as us, which means more capital for industry and commerce. Is it any surprise that the German economy is consistently out-performing ours?
There are a number of reasons for the disparity between the German and UK housing markets. Firstly, German home ownership is just over 40 percent compared to our 65 percent (there are stark regional variations – in Berlin 90 percent of all homes are privately rented) and the Germans do not worship ownership in the way we do. Not only is it more difficult to get mortgage finance (20 percent deposits are a typical requirement) but the private rented sector offers high quality, secure, affordable and plentiful accommodation so there are fewer incentives to buy. You can rent an 85 square metre property for less than £500 per month in Berlin or for around £360 per month in Leipzig. There is also tight rent control and unlimited contracts are common, so that tenants, if they give notice, can stay put for the long-term. Deposits must be repaid with interest on moving out.
In addition, Germany’s tax regime is not very favourable for property owners. There is a property transfer tax and an annual land tax. But the German housebuilding industry is also more diverse than ours with more prefabraction and more self-builders. The German constitution includes an explicit “right-to-build’’ clause, so that owners can build on their property or land without permission so long as it conforms with local codes.
But the biggest advantage of the German system is that they actively encourage new housing supply and release about twice as much land for housing as we do. German local authorities receive grants based on an accurate assessment of residents, so there is an incentive to develop new homes. The Cologne Institute for Economic Research calculated that in 2010 there were 50 hectares of new housing development land per 100,000 population in Germany but only 15 hectares in the UK. That means the Germans are building three times as many new homes as us pro-rata even though our population growth is greater than theirs. This means that German housing supply is elastic and can respond quickly to rising demand - hence their stable house prices, whereas in the UK our restrictive planning laws and tight green belts do not allow developers to respond to increased demand, so our supply is inelastic. More demand combined with a fixed supply of homes means steep price rises, volatility, and boom and bust.
For me, in the ongoing debate over our deepening housing crisis and the National Planning Policy Framework there are two stand-out lessons from the German experience. One, we are failing to release enough land for housing and this is causing volatility and unsustainable bubbles within our housing market that cause damage to our people and our economy. Two, a high quality, affordable, private rented sector benefits from regulation and rent control.
(Thanks to Andreas SchulzeBäing and ImmobilienScout for assistance with this article)