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MostGermansdontbuytheirhomes,theyrent.HereswhyQuartz

Most Germans dont buy their homes, they

rent. Heres why
Matt Phillips

January 23, 2014

Moving on up, in Berlin. (Getty Images/Sean Gallup)

Its just a fact. Many Germans cant be bothered to buy a house.

The countrys homeownership rate ranks among the lowest in the developed world, and nearly dead last
in Europe, though the Swiss rent even more. Here are comparative data from 2004, the last time the OECD
updated its numbers. (Fresh comparisons are tough to nd, as some countries only publish
homeownership rates every few years or so.)

Weekend editionLunar new year, Hitlers design taste, head scarves. All this and more in today's Daily Brief.
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And though those data are old, we know Germanys homeownership rate remains quite low. It was 43% in
2013.
This may seem strange. Isnt home ownership a crucial cog to any healthy economy? Well, as Germany
showsand Gershwin wroteit aint necessarily so.
In Spain, around 80% of people live in owner-occupied housing. (Yay!) But unemployment is nearly 27%,
thanks to the burst of a giant housing bubble. (Ooof.)
Only 43% own their home in Germany, where unemployment is 5.2%.
Of course, none of this actually explains why Germans tend to rent so much. Turns out, Germanys rentalhttp://qz.com/167887/germanyhasoneoftheworldslowesthomeownershiprates/

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heavy real-estate market goes all the way back to a bit of extremely unpleasant business in the late 1930s
and 1940s.

The war

(AP Photo)

By the time of Germanys unconditional surrender in May 1945, 20% of Germanys housing stock was
rubble. Some 2.25 million homes were gone. Another 2 million were damaged. A 1946 census showed an
additional 5.5 million housing units were needed in what would ultimately become West Germany.
Germanys housing wasnt the only thing in tatters. The economy was a heap. Financing was nil and the
currency was virtually worthless. (People bartered.) If Germans were going to have places to live, some
sort of government program was the only way to build them.
And dont forget, the political situation in post-war Germany was still quite tense. Leaders worried about
a re-radicalization of the populace, perhaps even a comeback for fascism. Communism loomed as an even
larger threat, with so much unemployment.
West Germanys rst housing ministera former Wehrmacht man by the name of Eberhard Wildermuth
once noted that the number of communist voters in European countries stands in inverse proportion to
the number of housing units per thousand inhabitants.
A housing program would simultaneously put people back to work and reduce the stress of the housing
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crunch. Because of such political worriesas well as genuine, widespread needWest Germany designed
its housing policy to bene t as broad a chunk of the population as possible.

The rise of renting

uary 1946. (Getty Images/Keystone)

Soon after West Germany was established in 1949, the government pushed through its rst housing law.
The law was designed to boost construction of houses which, in terms of their ttings, size and rent are
intended and suitable for the broad population.
It worked. Home-building boomed, thanks to a combination of direct subsidies and generous tax
exemptions available to public, non-pro t and private entities. West Germany chopped its housing
shortage in half by 1956. By 1962, the shortage was about 658,000. The vast majority of new housing units
were rentals. Why? Because there was little demand from potential buyers. The German mortgage market
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was incredibly weak and banks required borrowers to plunk down large down payments. Few Germans had
enough money.

Why Germany?
Its worth noting that Germany wasnt the only country with a housing crisis after World War II. Britain
had similar issues. And its government also undertook large-scale spending to promote housing. Yet the
British didnt remain renters. The UK homeownership rate is around 66%, much higher than Germanys.

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Why? The answer seems to be that Germans kept renting because, in Germany, rental housing is kind of

nice.
Economists think German housing policy struck a much better balance between government involvement
and private investment than in many other countries. For instance, in the UK, when the government gave
housing subsidies to encourage the building of homes after the war, only public-sector entities, local
governments, and non-pro t developers were eligible for them. That effectively squeezed the private
sector out of the rental market. In Germany, the role of public policy was to follow a third way that
involved striking a sensitive balance between letting the market rip in an uncontrolled manner and
strangling it off by heavy-handed intervention, wrote economist Jim Kemeny, of the German approach to
housing policy.
Britain also imposed stringent rent and construction cost caps on developers of public housing. Under
those constraints, housing quality suffered. Over time, the difference between publicly and privately
nanced construction became so glaring that rental housingwhich was largely publicly nanced
acquired a stigma. In other words, it became housing for poor people.
Germany also loosened regulation of rental caps sooner than many other countries, according to
economist Michael Voightlnder, who has written extensively about Germanys housing market. By
contrast in the UK, harsher regulation on rented housing stretched well into the 1980s, pushing landlords
to cut back on maintenance and driving the quality of housing down still further.
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Cheap rents

Of course, all that policy-design detail is interesting. But there might be a simpler explanation for the
popularity of renting in Germany. For one thing, its relatively cheap. (Germany is listed as Deu above.)

Renter-friendly regulations

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Why is renting cheap in Germany? Well, even though the countrys policies might have been slightly

more balanced than in other countries, its rental market is still robustly regulated, and the regulations are
quite favorable to renters. (Given the strong political constituency renters represent in Germany, this
shouldnt be too surprising.) For example, German law allows state governments to cap rent increases at
no more than 15% over a three-year period.

Tax treatment

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(Getty Images/Sean Gallup)

Theres another pretty simple reason Germans are less likely to own houses. The government doesnt
encourage it. Unlike high-homeownership countries like Spain, Ireland and the US, Germany doesnt let
homeowners deduct mortgage-interest payments from their taxes. (Theres more on the structure of
European tax systems here.) Without that deduction, the bene ts of owning and renting are more evenly
balanced. Both homeowners and landlords in Germany are barely subsidized, wrote Voightlnder in a
paper on low homeownership rates in Germany.
Those regulations, a solid supply of rental housing, and the fact that German property prices historically
rise very slowly thats a whole other storymean German rents dont rise very fast. And because one of
the main reasons to buy a home is to hedge against rising rents, the tendency of German rents to rise
slowly results in fewer homebuyers and a lower homeownership rate.
A number of other elements contribute too, but its tough to disentangle what is cause and what is effect.
For example, German banks are quite risk-averse, making mortgages harder and more expensive to get.
Others argue that the supply of rental housing might be higher in Germany because of its decentralized,
regional approach to planning. (The UK is much more centralized.)

Is Germany just better at housing?

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Not necessarily. Its not as if Germans spend a lot less of their pay on housing. The data below show

Germans actually pay more for housingas a percentage of disposable incomethan housing-crazed
countries like the US, Spain and Ireland.

But given the economic spasms suffered in house-crazy economies such as the United States, Spain and
Ireland in recent years, the German approach to housing looks pretty good right noweven if, before the
crash, the low homeownership rate was seen as an albatross around Germanys economic neck.
And German people clearly like how their system of housing works. According to the OECD, more than
93% of German respondents tell pollsters theyre satis ed with their current housing situation. Thats
one of the highest rates of any nation the rich-country think tank surveyed. Then again, the Irish and the
Spanishwhere homeownership is much more widely spreadseem just as happy.
Read This Next: Why Germans pay cash for almost everything

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