How the Germans keep a lid on prices

Published in The Age (Melbourne), 14 February 2011

You get a lot more house for your money in Germany and there’s a simple explanation for the stability in the housing market – steady growth in supply.

HOW does this sound? An outside staircase leads up to this modern villa. Built on a near quarter-acre block, it boasts four bedrooms, three bathrooms, floor heating, garage, sauna, pool and a landscaped garden, complete with a fish pond. The suburb is green and leafy, yet it’s only a short trip to the central business district by car or train.

But the best thing is the price: this dream home could be yours for just under $600,000.

”Where is the catch?” you may ask. Well, actually there is one: you would have to pay the price in euros as the house is currently on offer in Germany. Mind you, not in some sleepy village in the Black Forest or near the Baltic Sea. This villa can be found in one of the nicer suburbs of the national capital, Berlin.

International visitors are often stunned by German property prices. Every house and apartment looks like a bargain when compared with similar properties in Australia, Britain or New Zealand.

What you typically pay for a small flat in Ballarat or Wollongong would buy you a decent-sized family home in Cologne or Hanover. And for the price of a detached house in one of Australia’s capital cities, in Germany you would get a property so big you’d probably keep some of the savings and fill your new double garage with a BMW and a Porsche.

So what is it that has kept house prices so stable in Germany? Why do German house hunters get so much more for their money?

An analysis of the German property market shows that low German property prices are not a new phenomenon. We are not looking at a market that had suddenly suffered a big house price crash. Quite the reverse is true: Germany’s housing market has never had a big boom.

Before the global financial crisis, property markets in many countries went red hot with price increases. Between 2000 and 2007, real house prices increased by 94 per cent in Spain, 84 per cent in New Zealand, 80 per cent in Britain and 65 per cent in Australia. In Germany, real house prices actually fell by 18 per cent over the same period.

Looking at German house prices over an even longer time, they reveal a market characterised by stability. According to Organisation for Economic Co-operation and Development data, German house prices stand slightly below the price level of the early 1970s when adjusted for inflation. In other words, had you bought a house in Germany some 40 years ago, you would have made a loss on your capital investment.

Germany’s long-term house price stability is odd. Where other international property markets have generated booms and busts, bubbles and corrections, Germany has experienced nothing of the kind.

That Germany is so different with regards to house price developments has little to do with the housing needs of its population. As in all other developed countries, Germany had to deal with shrinking household sizes and, until very recently, migration and population ageing also led to a moderate population increase.

What is different about Germany, though, is the supply of housing. Put simply, the Germans have continuously built more houses and flats than other countries. They have also zoned more land for development, even though Germany is one of the most densely populated countries in Europe.

The constant supply of land for development has ensured a steady supply of housing. This, in turn, has not only kept house prices low, it has also prevented any kind of property speculation.

If you know that future housing supply will have a dampening effect on house prices, you will only buy a house if you actually want to live in it. But you wouldn’t regard it as a clever investment; you might even count yourself lucky if you managed to recover your money if you decided to sell your house.

The reason Germany has such strong housing supply is not obvious. Planning and building regulations in Germany are not less complex than elsewhere – if there is one people on earth that knows a thing or two about bureaucracy, it is the Germans.

When it comes to planning for development, however, Germany’s complicated regulations do not matter much. That is because the interests of house buyers, builders, developers and town planners are in sync.

Buyers obviously want to buy something they can afford. Builders and developers would like to provide it to them today rather than tomorrow. And German town planners know that the best way they can help their councils is to make sure that the planning and building process works as smoothly as possible.

German town planners’ enthusiasm for development has a simple explanation. German councils receive large chunks of their budgets from state governments and just how much they receive depends on local population figures and tax revenue generated.

Because there is such a direct link between housing development and the councils’ budgets, town planners try everything they can to lure more inhabitants into their area.

House hunters are potential taxpayers – and so they are treated as clients, not as opponents. Stable house prices are a side effect of this competition for new residents.

In Australia, we have so far tried to ameliorate the effects of our unaffordable housing market only with first-time buyers grants and public housing. To make the whole market much more affordable, perhaps we should copy the German model instead.

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