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Grand Coalition: Homeownership to be Promoted

15.

February 2018

With nearly five month gone since the general election for the German Parliament, a new government is about to be formed now. The Christian Democrat bloc and the Social Democrats finally settled on a coalition agreement, although it has yet to be approved by the Social Democrat party base. During the coalition talks, Christian Democrats and Social Democrats agreed on a number of measures in the housing sector. It is intended to promote homeownership as well as housing construction, but also to keep revising landlord-tenant law. Allowances to promote the acquisition of private homes has been urged for a long time by numerous representatives of the real estate industry. Germany’s homeownership rate is the lowest in the European Union, as only 45 percent of German households occupy homes they own outright. This is ominous insofar as there is no better retirement scheme than homeownership, and it is unwarranted because low interest rates and rising wages have made it rather easy for many households to buy a home and to obtain financing. The problem that many potential homebuyers face is to come up with the necessary equity.

Real Estate Transfer Tax Likely to Remain in Place

Christian Democrats and Social Democrats intend to address the dilemma by introducing a child tax credit for first-time home buyers. Over a ten year period, families are supposed to get 1,200 euros per child and year in aid. The scheme will be limited to households whose annual income does not exceed 75,000 euros plus 15,000 euros for each child. But this hardly qualifies as a solution for the main problem many households face when trying to buy a home. The main difficulty for young families is to scrape together enough equity capital at the time of the acquisition—getting government funding in small increments will do little to help with this issue. It would be far more sensible to support families who contemplate homeownership as first-time buyers to waive the real estate transfer tax, which can be as high as 6.5 percent of the purchase price. According to the coalition agreement, however, this measure is to be “reviewed” only. Such ambiguous phrasing makes it doubtful that such a waiver—which has long been a reality in countries like the United Kingdom—will ever be introduced. The thing is, waiving the real estate transfer tax would mean a substantial reduction in incidental acquisition costs not covered by the building loan and in the equity requirement, enabling a large number of households to pursue homeownership. Another component Christian Democrats and Social Democrats intend to use to support homeownership is the introduction of a surety program to be offered through the KfW development bank. KfW would underwrite the financing for part of the purchase price or the construction costs, so as to help low-income household to acquire a home.

Legislative Changes to Landlord-Tenant Law to be Expected

In addition, Christian Democrats and Social Democrats intend to get housing construction up to speed via a “housing campaign.” The target fixed in the coalition agreement is 1.5 million new flats. To achieve this, it is planned to introduce, on top of an intensification of social housing development, a limited special depreciation allowance of five percent annually over a four-year period, which is meant as an incentive for private investors to raise new residential accommodation. Then again, the coalition government seeks to discourage private investments through yet more constraints built into landlord-tenant law. Not only is it planned to tighten the rent control by obligating landlords to disclose the rent paid by previous tenants, but it is also planned to limit the amount landlords may recover from tenants for modernisations. The apportionment is to be lowered from eleven to eight percent, and to be capped at a maximum of three euros per square metre and month. This could actually cause investments in the housing stock to decline in the future.

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