Suburbs are emptying
– What is happening today on the German real estate market?
– First of all, clients are increasingly less interested in a detached house and more often choose an apartment. Fifteen years ago, the typical buyer or renter of housing was a family with two children. Such a family needs sufficient space, preferably in a green area, so that the children have somewhere to play. The ideal option was a small house in the suburbs with a small garden. There was huge demand for such houses. Now the demographic situation in the country is changing; in Germany there are more and more childless couples and more and more elderly people. There are many single people. Typical city dwellers today are people aged 30-40, single, well-earning. Such residents now make up over half the population of large cities. The new generation of our clients does not need large country houses; on the contrary, they need something compact and located in the city center – close not only to work, but also to theaters, museums, cinemas, and so on. So whereas 15 years ago Germans were mass-moving from cities to suburbs, today the movement is in the opposite direction – people are selling houses in rural areas and returning to cities.
– If demand for suburban houses is falling and demand for city apartments is rising, that should affect the price of urban land.
– It practically does not affect it. The price of land plots in large cities is already very high, and the growth in housing demand does not affect it much. Moreover, there is currently a certain decline in the construction of office buildings; Germany is oversaturated with office space, and therefore land prices in large cities have stabilized.
– At what level?
– Prices vary in different cities. The larger the city, the more chances there are to find a good job, the more expensive housing is. Traditionally, the most expensive cities in Germany are Munich and Frankfurt. In Frankfurt, a square meter of land costs an average of €600. A standard two-story single-family house, without a garden, attached wall-to-wall to neighboring houses, will cost at least €250,000. And somewhere in Thuringia, where land costs almost nothing, the same house can be bought for €140-150 thousand.
Non-market rent
– Do Germans prefer to buy housing or rent it?
– Own housing is always a desirable thing. The majority of the country's residents would be ready to buy a house or apartment if they had the financial opportunity to do so. But in real life, only 43% of Germans own their own housing – this is even somewhat below the average level for the European Union.
The fact is that over the past ten years the state has been purposefully scaling back programs to stimulate the purchase of housing by private individuals. Previously, when buying their own home, a German family, depending on the number of children and income level, could count on a subsidy of up to €30,000. Today there are no such subsidies anymore.
On the other hand, the state strictly regulates price levels in the rental housing market, keeping them at a fairly low level. As a result, buying housing is becoming more expensive, and renting is becoming more attractive. Today, a family that takes out a loan to buy an apartment or house must understand that over the next 20-25 years their loan repayment costs will significantly exceed the costs they would incur if they rented the same housing. Not everyone will take on such a burden.
– What does state regulation of rent consist of?
– In each city, local authorities conduct research on the housing market situation and determine the average rental cost for each type of apartment. For example, a two-room apartment with an area of 60 square meters, a three-story building built in 1950. Or a three-room apartment with an area of 80 square meters and a four-story building built in 1970. Then this average cost is officially fixed as the base price for this type of apartment in that city, and housing owners do not have the right to rent it at a price exceeding the base price by more than 20%. In addition, each price increase can only be carried out once every two years.
After a few years, another study is conducted, and if it is found that all landlords have increased the price, the base price is raised again. This is a very complex bureaucratic system that limits competition in the housing market. Due to such non-market regulation, the average rental cost per square meter of housing in Germany today is €10 per month. At the same time, the current monthly expenses of a homeowner for maintaining the house amount to €13-14 per square meter.
– That is, apartment owners work at a loss?
– Not exactly. Indeed, recent years have been quite difficult for apartment owners, many have simply gone bankrupt. But this is not directly related to artificially low rental prices – after all, the maximum prices set by the state have been below market prices for about thirty years. The situation is more complex and is connected with the general stagnation in the real estate market.
The fact is that the traditional investment scheme, according to which many small German developers have worked for the last 30-40 years, was based on constant and significant growth in real estate prices. Essentially, the developer built a house only to resell it 15-20 years later at a greatly increased price. In such a scheme, renting out apartments was just one source of income, and the fact that it did not cover all the costs of maintaining the house was not so important. But in the last 4-5 years, real estate prices in Germany have stabilized; they have almost stopped growing. Investments made 10-15 years ago are paying off much worse. Building housing today with the intention of renting it out means dooming yourself to losses; practically no profit can be obtained from this anymore.
The developer's burden
– Are there any other problems that make it difficult for developers to work?
– Yes, this is a tightening of the tax burden. Previously, companies engaged in housing construction received tax breaks – to the extent that small developers could, under certain conditions, register as building cooperatives and be completely exempt from income tax. In the 1990s, the authorities decided that the construction market no longer needed such support, and all benefits were abolished. In recent years, tax breaks for individual owners of residential houses renting them out have also been abolished. In fact, neither at the construction stage nor at the operation stage can one save on taxes anymore.
– What does the process of building a residential complex look like in Germany? Surely a lot of approvals are required?
– There are three main negotiating partners – the developer company, local government authorities, and the owner of the land plot on which construction is planned. The developer raises money and carries out construction, local authorities provide the necessary infrastructure and subsequently receive compensation for this from the land owner, and the land owner either sells the land to the developer or leases it for a long term. The law does not specify a maximum lease term, but in practice 50- and 99-year lease terms are most common. Leases are most often concluded on terms of an annual increase in payments of 4-5% to compensate for the rise in land prices.
Avoiding ghettos
– Is there a concept of 'social housing' in Germany?
– Yes, there is. Social housing here means inexpensive apartments that are rented out at a low price to low-income citizens.
– Who builds social housing?
– The same private construction companies, including us. If there is a shortage of social housing in an area, local authorities approach us, we select a plot and begin construction. At the same time, the construction itself and subsequent use of the housing are regulated in a special way. On the one hand, during construction work the developer still receives some tax breaks; on the other hand, the rent in such a building must be lower than the city average for similar apartments. Of course, only a person whose income does not exceed a certain amount can rent such an apartment. There are also a number of other restrictions, for example, the tenant can only rent an apartment of a certain size, which is calculated based on the number of family members; such an apartment cannot be sold or removed from the social housing stock for 20-30 years, and so on. Although overall this system helps solve the problem of low-income families, it creates additional problems.
– Social ghettos?
– Exactly. You gather socially disadvantaged families, often immigrant families, and house them together in one specially built neighborhood. Fifty, one hundred, two hundred families. You are essentially planting a small social time bomb.
– But this problem is not new for Germany; have there been attempts to solve it?
– Of course, it is not new. In general, social ghettos in modern European urban development appear naturally, even without the construction of special social housing. How did this usually happen in German cities? After the war, cities were destroyed, and there was a catastrophic shortage of housing. To solve the problem, a campaign was launched to build mass cheap housing – three- and four-story multi-entrance buildings. For their time, they were quite decent, and people were happy to finally move into their own homes. But over time, the buildings deteriorated, wealthy people moved out, and poorer and poorer citizens moved in. Up to a certain point, the process of changing the social group living in a building or neighborhood is slow and gradual, but sooner or later the number of socially vulnerable people living in a building reaches a critical point, the remaining wealthy residents move out en masse, and that's it – the process of social group change is complete.
– The neighborhood acquires a persistent reputation as a ghetto.
– Yes, and it is unpleasant for everyone: for apartment owners, for residents of neighboring houses, for the police, for the city hall. So, there are only two possible solutions to such a problem. The first is further, even greater segregation, the deliberate creation of ghetto districts. France followed this path – squeeze the ethnic poor further away and isolate ourselves from them. We know how that ended. The second option is integration. Constant attempts to raise property values in these areas, to attract educated, wealthy people. This is a more difficult option, but it is also more promising. This is what Germany mainly chooses.
– And how exactly is this done?
– In the mid-1990s, the federal association of housing construction companies GdW conducted a study that identified the main reasons leading to the accelerated creation of ghettos: aging buildings, general deterioration of district infrastructure, declining quality of service in schools and kindergartens, a shortage of hospitals. Based on this study, the federal government adopted the 'Social City' program, under which from 1999 to 2003 the federal budget allocated funds to solve these problems. In fact, the government decided to extinguish smoldering hotbeds of social discontent before something worse happened. And overall, it worked. At least, I cannot imagine that riots of the French type could occur in any German city now.