Affordable housing push

A broad alliance of major German housing-related associations, the Verbändebündnis Wohnungsbau (VBWB), presented a "German Plan for Affordable Housing" on Wednesday (10.9.2014) in Berlin.

"Having a place to live is a basic need," said Hartmut Goldboom, a representative of the German construction materials supply industry, speaking on behalf of the alliance. "It should be affordable."

The VBWB claimed that the monthly rent of a typical medium-quality new apartment in Germany's major cities could be reduced by as much as 40 percent compared to current prices, if the government adopted a set of policies making it cheaper to build new apartments.

That could represent a great benefit to millions of renters over coming years - if it turned out to be both accurate and achievable. Moreover, despite its focus on Germany, the twin reports underlying the VBWB report could prove thought-provoking for policymakers in other countries faced with housing affordability challenges.

Reducing the landlord's claim on renters' monthly income

One of the studies underpinning the report was produced by the Hanover-based Pestel Institute, which specializes in regional development and urban planning studies.

"In pre-unification West Germany, we had around four million social housing units. But a wave of privatization policies post-unification has led to a situation where there are only a million and a half in the whole of unified Germany today," said Pestel Institute director Matthias Günther.

"There's a shortage of affordable housing in the bigger cities - not in most small towns, or in the countryside, but in big cities it's getting worse. We need another 250,000 to 300,000 new apartments in the cities - affordable ones, for low- and middle-income people."

The study's focus was on new build, not on renovations. The latter may make life better for residents, but they don't increase the building stock - or its affordability.

What is "affordability"?

"We assumed that the monthly rent should be no more than one-third of a family's after-tax net monthly income, if it's to be considered affordable," Günther said.

"In our study, that means a typical inner-city apartment inhabited by a family with an average income shouldn't cost more than 7.50 euros per square meter for basic 'cold' rent, exclusive of expenses like heat, hot water, maintenance costs and electricity."

The Pestel study estimated the current average 'cold' rental price of an apartment in a medium-quality new-build 12-unit city apartment building in Germany to be 10.05 euros per square meter.

That translates into a rent of about 734 euros a month for a typical 73-square-meter (790-square-foot) apartment. In the context of a typical family income, that's 186 euros a month over the limit of affordability.

The situation is much worse in some super-expensive cities, notably Munich, where the average rental price of apartments was 15.67 euros per square meter as of September 2014, and on an upward trend.

Günther estimated the monthly rent of a typical new apartment could be reduced by as much as 4.15 euros per square meter if new policies were adopted to slash the all-in cost of new residential apartment construction projects - assuming the cost savings are passed on to consumers. For a 73-square-meter apartment, that would mean a savings of 302 euros a month, compared to the current average price of 10.05 euros per square meter.

Tax treatment is the key

"The biggest savings would come from a change in the tax treatment of new buildings," Günther said. "For decades, under German tax law, investors could offset just 2 percent of the construction cost of a new building per year for tax accounting purposes, which means buildings were fully depreciated only after 50 years."

Architect Dietmar Walberg, CEO of ARGE, a consultancy specialized in modern construction techniques, said the depreciation rate set decades ago is no longer appropriate today.

"New buildings contain a great deal of technology - heating and cooling systems, elevators, and so on - that must be replaced after 15 or at most 25 years, so a 50-year tax depreciation horizon is no longer appropriate," Walberg said.

"Today, 55 percent of the construction price of new buildings is made up of technology - much more than in the past. Only 45 percent of the construction cost is generated by the basic structure, the walls and floors," Walberg said. "Replaceable elements like heating and cooling systems wear out much faster than walls and floors, and the depreciation charge should be adjusted to reflect that."

The Pestel Institute report explored the consequences to the rental price of a typical apartment of changing the tax treatment for new buildings from a linear 2 percent annual depreciation rate to a 3 or 4 percent rate, among other scenarios. According to Pestel's Günther, a 4 percent rate would lead to a drop in rental price of 2.63 euros per square meter.

The Pestel study also estimated that a 25 percent reduction in the median cost of land zoned for construction - achievable if German municipalities were to make land available at below-market prices - would lead to about 0.60 euro per square meter reduction in the cost of rent for residents of newly built apartments.

A 1 percent decrease in the cost of borrowing project development funds - for example, through low-cost loans extended by Germany's public development bank - would lead to a further savings of nearly one euro per square meter.

But achieving the savings would require government policy support. The biggest opportunity would lie in a change in the depreciation rate for tax accounting purposes. The question is whether Germany's federal government is likely to approve such a change.

The minister isn't convinced

Hartmut Goldboom noted that in July, Barbara Hendricks, Germany's current environment minister - whose responsibilities include national construction sector policies - had called together an alliance for affordable housing, involving a wide range of public sector, industry and consumer groups.

The VBWB's "German Plan for Affordable Housing" was meant to respond to the Minister's call for input - and to put forward a plan supported by a wide range of interests.

The group's seven member associations include construction industry, union, renters', and real estate developers' associations. Speakers underlined that the report and policy proposals presented Wednesday enjoyed the unanimous support of an impressively diverse set of interest groups.

But that may not be enough to get Hendricks' support. Responding to interview questions shortly after the VBWB's presentation of its policy proposals in Berlin, she outlined the difficulties of making tax policy in a coalition government composed of center-left Social Democrats (SPD) and center-right Christian Democrats (CDU).

"In our coalition agreement negotiations after last year's elections, the SPD wanted to increase some taxes, and the CDU wanted to reduce some taxes," she said. "We couldn't come to an agreement, and in the end we dropped tax changes from the agenda. I don't expect any changes in this legislature."

Hendricks also said that the real estate development sector was booming in Germany at the moment, and that increasing the depreciation rate on new buildings would tend to further stimulate the boom.

"Setting up tax incentives to stimulate a sector makes sense when the sector is depressed. The construction sector is booming - some people are even worried there might be a bubble forming in some cities. This isn't the time to provide additional tax incentives. That's something I'd rather hold in reserve for a different time," she said.

According to the VBWB, however, the problem isn't a lack of activity in the housing construction sector. Plenty of buildings are being built - but in many of Germany's largest cities, few of those buildings can be built cheaply enough to make living in them an affordable proposition for middle and lower-middle income residents.

When DW asked the minister if higher depreciation rates couldn't perhaps be targeted specifically at new buildings aimed at the affordable-housing market, she said no.

"How could that be done in fiscal regulatory terms? I don't think that could work," she said. "The government's affordable housing policy involves two elements: Providing money to subsidize some new buildings and providing money to low-income people. No tax changes are planned."

However broad the range of housing-sector interests represented by the VBWB, it's clear that if their support base doesn't include the relevant minister, their proposals will remain nothing more than interesting ideas.