Germany may hold the key to solving New Zealand’s housing woes

Published on (Wellington), 25 January 2017

This week, Demographia released their annual housing affordability survey. It has become a sad ritual at the beginning of each year to find out how unaffordable property has become across much of the English-speaking world.

House prices have gone through the roof. The benchmark for affordability used to be for an average house to cost about three times an average household’s income. No longer. In Auckland it is now 10 times income, in Sydney 12 times and in Hong Kong 18 times.

This is no longer just a housing crisis. It is an unaffordability disaster, especially for anyone on a moderate or low income and for the younger generation.

Demographia deserves credit for highlighting this issue and holding our political leaders to account for their failure on housing and planning policy.

If there is one thing, though, that is missing from Demographia’s report it is a reference to some key markets outside the Anglosphere – markets that have not experienced the same wild price exaggerations. Germany, for example.

There is a wonderful anecdote about the late Lord Alexander of Weedon who, as chairman of the British bank NatWest, visited the German Bundesbank many years ago.

Lord Alexander was carrying a copy of an English newspaper that displayed a headline to the effect: “Good news – another rise in house prices”, on which the legendary Bundesbank president Karl-Otto Pöhl commented: “Over here, that would be bad news.”

The anecdote sums up quite nicely how different Germany is with respect to housing. The Germans believe that stable or falling house prices are a good thing, and that is just what they got historically.

According to The Economist’s House Price Index, the average German house today costs exactly as much (adjusted for general inflation) as it did in 1980.

Unfortunately, The Economist does not have data for New Zealand but it shows that over the same period real house prices more than doubled in Ireland and Canada and more than tripled in Britain and Australia. Which makes Germany’s price stability look even more remarkable.

There are, of course, many things that make the Germans different from their Anglosphere friends. They speak a complicated language with long words. They love pickled cabbage. They have an impenetrable sense of humour.

Such superficialities aside, there is nothing too unusual about the Germans. They, too, need housing. Their population density is quite high. They have to deal with the demands of an ageing society living in smaller households. And they have a strong economy creating additional housing demand.

So if all of this is the case, then how on earth did they manage to escape the global trend of rising house prices?

Well, in short, because they just built more.

The long answer is a bit more complicated.

It is not just enough to say that they built more because that would just be to state that prices are determined by demand and supply. The real question is “Why did the Germans build more?”

The reason why Germany got more built is because there was greater political will to do so. And there are better incentives for towns and cities to deliver the housing that their citizens need.

Just as everything else in Germany, local government finance in Germany is fiendishly complex. However, one thing stands out about the way German local government is funded. Local budgets heavily depend on local circumstances. The more people call a city home and the more taxes are generated locally, the more a council will receive in revenue.
For German cities, attracting people therefore makes good sense. They are not just attracting people but, in effect, taxpayers. And these new taxpayers then, effectively, pay for their own infrastructure that they need.

In this way, German councillors and planners have been much more eager to zone land for development and speed up planning processes. In doing so, they have kept housing supply flexible enough to keep up with demand.

The result is a property market that has long been characterised by long-term stability. It also made it unnecessary to jump into home-ownership at an early age. People knew that they were not missing out on any capital gains – and remained tenants. Hence Karl-Otto Pöhl’s comments that the Germans were happier about falling prices.

In recent years, the German situation has changed somewhat because of the ECB’s zero interest rates and capital flight from the Eurozone into Germany. However, even after all of that house prices are still only where they were more than 35 years ago.

If we want to spare ourselves more reports like this week’s Demographia survey, perhaps we should be thinking about applying some of the German housing lessons to New Zealand. Ever-rising property prices are not unavoidable as the German example shows.

Nor are they desirable, as young Kiwis can attest.

Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative. He wrote the foreword to the 2017 Demographia report.

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