The Scientific Advisory Council of the Federal Ministry of Economic Affairs has sounded a wake-up call for the Federal Government with an expert opinion on Germany’s housing policy. The committee of 34 economists believes that nothing short of radical turn-around is necessary to get on top of the issues plaguing the country’s housing market (source: www.sueddeutsche.de). The reactions from the body politic have been fierce—which was to be expected because the expert opinion of the government advisers declared the so-called rent freeze and social housing development inefficient, these being two major housing policy components, especially for the Social Democrats, Greens and the Left.

The government advisers write in their opinion that capping rent rates has actually prompted an intensification of the housing shortage (source: www.bmwi.de). The experts argue that, on the one hand, the rent freeze creates few incentives to rent out apartments at all, which can result in vacancies or in the use of apartments for non-residential purposes. On the other hand, the construction of new housing becomes less lucrative if rents are controlled. However, the economists’ calculation seems to contain an error because they assume that even the rents of new-build flats are subject to a cap if the flats are re-let (source: www.welt.de).

Demand-Side instead of Supply-Side Subsidies

The committee’s expert opinion also criticises social housing development even though it does create new accommodation, an outcome principally to be welcomed. The problem they see is that the subsidies often end up benefiting the wrong households since eligibility is usually checked only once. Indeed, 23.4 percent of all households living in subsidised flats actually belong in an upper income bracket. At the same time, the government advisers warn against the creation of social ghettos.

As alternative to supply-side subsidies like that of social housing development, the committee advocates stepping up demand-side subsidies. The experts call for an increase in housing benefits and in the rent costs eligible for consideration. Moreover, they propose restructuring housing benefits in such a way that more claimants can actually assert their claims—at present, the housing benefit only reaches a fraction of those entitled.

Publication just ahead of the Housing Summit

Rather than intervening on the housing market with regulations, the government should intensify its focus on the expansion of the housing stock, the committee suggests. Especially infill densification and the zoning of new building land should be stepped up.

The expert opinion of the Scientific Advisory Council was published around four weeks ahead of the pending Housing Summit in the German Chancellery. The summit, which will be attended by real estate industry groups and tenant interest groups in addition to representatives of federal- and state-level governments, is supposed to set the housing policy parameters for the rest of the parliamentary term. The expert opinion could definitely influence the summit—and this may well be the explanation for the strong reactions to it. Federal Minister of Justice Katarina Barley (a Social Democrat) called the scholars’ line of argument “irresponsible", (source: www.spiegel.de) while the Greens criticised the expert opinion as a “frontal assault on our country’s social housing policy". (source: www.handelsblatt.com) But even Peter Altmaier, the Minister of Economic Affairs and a Christian Democrat, held back in his response and in no way spoke out against the rent freeze (source: www.welt.de).