What is the current housing market
Shortage of rental apartments in Germany: causes, instruments, implications –
Rising rents, especially in metropolitan areas, characterize the German rental housing market. The central cause is a relatively low elastic market supply with increasing demand for years. The reasons for the (at least in the short to medium term) rigid housing supply are diverse and include, among other things, scarce building land, longer-term building permit procedures, usually multi-year construction periods for real estate, the increased number of building regulations and full or overused capacities in the construction industry. The development of demand, on the other hand, is primarily driven by three aspects: demographic development (especially singularization), internal migration (especially urbanization) and the good labor market situation for years (Möbert, 2018). The imbalance can accordingly be clearly characterized by excess demand. Despite the clear price effects1 in recent years, a return to equilibrium is not yet in sight. Although residential construction investment has (again) been increasing since 2015 (Deutsche Bundesbank, 2019), supply remains scarce as the number of building permits is tending to decline.
The imbalance results in two challenges for (rental) housing policy: First, the supply problem, which is about how the provision of housing can be efficiently organized or supported. This results from the lack of availability of actual living space as the primary problem. The hardly elastic supply due to apartments as immobile goods with a long construction and usage period makes it clear that the housing market (in its current state) is hardly dynamic enough: State intervention in the market could contribute to the solution and thus increase welfare.
Second, an allocation problem follows from the supply problem: It is necessary to clarify how the group-specific housing needs (especially for low-wage earners, families, students, pensioners) can be satisfied. The sufficient availability of living space is the necessary condition, the socio-political distribution the sufficient condition for solving the rental housing market problem. The allocation problem is at the same time relevant in terms of social and distribution policy, since rent is the most burdensome component of household income at around 20% to 33% (Council of Experts for the Assessment of Macroeconomic Development [SVR für Wirtschaft], 2018, 697) Years after disposable income, a disproportionate burden on low-wage earners can be seen.3 This means that a market mechanism is sought that both provides quantitatively sufficient living space (necessary) and enables households to access the rental housing market (adequately) taking into account their economic performance . Against this background, the question arises to what extent the available housing policy instruments can contribute to solving the supply and allocation problem and whether additions make sense, if necessary.
Offer on the rental housing market
In Germany, the number of residential buildings totaled around 39 million apartments in 2014 (Federal Statistical Office, 2014). If you aggregate the stock gap since 2009, the current stock deficit is more than 1 million apartments; despite a forecast of 315,000 completions in 2019 (Möbert, 2019). One of the main reasons for the supply problem is the limited availability of building land. The current shortage is also reflected in the nationwide increase in the price of building land by 50% between 2010 and 2019. In the largest cities, prices even doubled within five years (Building Land Commission, 2019). If the inner-city building land is exhausted, there are only two options for creating living space: on the one hand, the inner development of the cities, on the other hand, moving to the surrounding area. With regard to interior development, there is an estimated maximum potential of 2.3 million to 2.7 million apartments that could be created through densification in major German cities (Pestel Institute, 2019). The prerequisite for this would be an adaptation of building regulations such as fire, noise and emission protection requirements as well as parking space requirements. However, this potential calculation leaves out possible acceptance problems, which are to be expected in view of the resistance of the already resident population and would lead to a significantly lower number of possible realizations ("Not in my backyard" problem, NIMBY for short). In addition, the surrounding public infrastructure for services of general interest (kindergartens and schools, medical care, parking spaces, etc.) would have to be increased. For the success of the external development, however, an effective transport connection to decentralized residential areas is a critical factor. Since shrinking and growing cities are often in the immediate vicinity, an improved transport infrastructure could help to balance demand between regions (Voigtländer, 2014, 13-14).
The designation of building land is subject to regulation-intensive and interest-driven approval procedures, so that the design and practical implementation of development plans cannot react simultaneously to changes in demand. An increase in the scarce human resources in the building authorities could accelerate the issuing procedure for building permits (Voigtländer, 2014, 9-10). Lean procurement procedures and the elimination of the usual intermediate buyers (sponsors and trustees) have also made it possible to lower the transaction costs for the acquisition and thus the price of building land. Construction areas could then be passed directly to the end user (Mense et al., 2016). On the other hand, more complex awarding of concepts would be beneficial to social housing, since the usual maximum price auctions make it more difficult for municipal housing associations to acquire them.
In addition to the scarcity of building land, the development of building costs in recent years is an important supply-side driver: In Germany, building prices fluctuate strongly with the economic cycle. The high capacity utilization in recent years led to a nominal price increase for labor and construction services of 27% between 2000 and 2014. In addition, there are increased regulatory requirements in the new construction segment. From 2000 to 2016, regulations in the areas of energy efficiency, fire and noise protection as well as accessibility increased the construction costs by an additional 18% (SVR für Wirtschaft, 2018, 366; Wahlberg, Gniechwitz and Halstenberg, 2015). These increases in price cannot easily be revised, since the adjustment, temporary suspension or even abolition of regulatory requirements would result in conflicting goals in the area of environmental, flood, fire protection and energy efficiency.
Demand in the rental housing market
On the demand side, demographic change and its incorrectly assessed consequences are one of the causes of the market imbalance. While the population in Germany (as forecast) increased by only 3.5% between 1991 and 2017, the number of households rose by 17% in the same period (singularisation) (SVR für Wirtschaft, 2018, 334). As a result, consumption of living space per capita has also increased steadily over the past few decades. On the one hand, the so-called cohort effect is responsible for this. H. the increasing consumption of land from generation to generation with increasing prosperity of a society. On the other hand, the age structure effect means that the consumption of living space increases with increasing age; for example, if parents do not reduce their consumption of living space after their children have moved out. In an aging society, this leads overall to an increasing overall demand for living space (Deschermeier and Henger, 2015).
Another demand-side cause is internal migration, which tends to take place from east to west and from rural to urban areas (SVR für Wirtschaft, 2018, 662, 664). Reasons for migration from rural areas to cities include advancing tertiaryisation, i. H. the increasing demand for service occupations, the better opportunities and opportunities to participate, e.g. B. broadband connections, cultural offers and educational infrastructure (Michelsen, 2019) as well as improved services of general interest (Henger, Schier and Voigtländer, 2015). Contrary to the trend, however, young families with an increased need for living space have been asking for more suburban and rural living space again since 2014. The increased housing costs can make moving to the countryside attractive or necessary. At the same time, the job density in the non-urban surrounding area increased significantly between 2011 and 2016 (Henger and Oberst, 2019). These developments show potential to contribute to solving the supply problem through suburban external development. Compared to the development of rural areas, this results in economies of scale in the provision of public infrastructure in suburban residential areas.
In addition, the good situation on the labor market for years with a high level of employment and rising wages is contributing to an increasing demand for housing. For example, the nominal wage index has exceeded the development of consumer prices since 2014 (Federal Statistical Office, 2019) .4 The consequences of the expansion of education are also not to be neglected: the number of students has increased by 28% since 2010, which increases the demand for housing in university cities ( Oberst and Voigtländer, 2018, 4). Table 1 summarizes the supply-side and demand-side causes of the market imbalance.
Causes of the shortage of rental apartments
|On the supply side||Demand side|
|Low building land availability |
⇒ internal development
⇒ External development
|Demographic change and singularization |
⇒ Reduce per capita living space consumption (e.g. strengthening the right to sublet)
|Long-term building permit process |
⇒ Accelerate the procedure
↯ community interest groups
↯ Elaborate concept awards enable increased social housing construction
|Internal migration |
⇒ Strengthen rural (transport) infrastructure
↯ Loss of economies of scale with a decentralized housing structure
|High capacity utilization in the construction industry |
⇒ expand capacities
↯ medium-term underutilization of capacities
|Good job market|
|Increased number of building codes |
⇒ adaptation / abolition / temporary suspension
↯ Conflicting goals with environmental / fire / noise / water protection
|Increasing student numbers|
Notes: ⇒ measures; ↯ contradiction.
Source: own illustration.
Selected housing policy measures
The lack of availability of living space (supply problem) results in an allocation problem. Different population groups are disproportionately burdened by rent increases. In the period from 1993 to 2013, the housing costs of households with the 20% lowest incomes rose by 32%, while they decreased by 9% for the 20% highest-income households (Dustmann, Fitzenberger and Zimmermann, 2018, 12-13). It should be noted, however, that the strongest price increases were not observed until after 2013: There were rent increases for new contract rents compared to the previous year of 3% (2014), 5.5% (2016) and 3.5% (2018) ( Möbert, 2019). In addition, 63% of tenant households over 65 years of age spent more than 30% of their income on rental costs in 2016; 38% even more than 40% (Gordo et al., 2019). The rents for student accommodation also rose between 2010 and 2018 in a range from 12.9% (Greifswald) to 93.8% (Berlin) (Oberst and Voigtländer, 2018, 16). These developments justify the socio-political demand for measures to increase allocation efficiency in addition to increased living space availability.
The rent brake was introduced in 2015 to counter the price trend on the rental apartment market. Since then, the rents in new rental contracts may not be more than 10% above the local comparative rent, which can be determined using a regional rent index. Instead of a nationally practiced rent regulation, however, state or municipality-specific rent brakes have been established. This runs counter to the widespread effect of the rent brake.
In addition, the actual effectiveness of the rent brake is questionable. Regulated rents were initially just under 2.5% below the unchecked prices, only to fall back to an unregulated level in the second year of observation. The short-term effect is particularly evident in the lower price segments (Breidenbach, Eilers and Fries, 2019). If, on the other hand, one differentiates between markets with strong and weak rental growth, a positive partial summary can be drawn of the primary effect of a price dampening.5 In metropolitan areas with growth rates of more than 4.8%, after the introduction of the rental price brake, prices initially fell by an average of 3%, with lower rental trend levels were added. Conversely, however, an increasing increase in rents is observed in unregulated markets.
The effect of the rent brake on new construction investments in unregulated markets is ambivalent, depending on whether investors expect higher returns (Michelsen, 2017) or the negative consequences of real estate regulation (SVR für Wirtschaft, 2018, 703). However, even increasing investments as a result of the rent brake would hardly change the supply problem. Rather, the rent brake in regulated residential areas works in principle to stimulate demand. The supply, on the other hand, will tend to shrink as a result of the exemptions and apartment sales. The advantage is drawn to tenants (insiders) who pay a regulated rental price, while apartment hunters (outsiders) are exposed to increasing excess demand (SVR für Wirtschaft, 2018, 708).
In 2017, around 1.4% of households received a housing allowance in the form of housing benefit (Federal Statistical Office, 2018). The housing benefit is linked to the individual income situation and the consumption of living space and can avoid false incentives through continuous feature reviews, as the payments can be flexibly adjusted or discontinued. Both the efficiency of the measures and the socio-political support intention are taken into account accordingly. In addition, the market supply can react to the increased demand in the long term and more living space can be provided (Hiller and Schultewolter, 2014). For this, however, a credible state obligation to regularly adjust and pay the housing allowance is fundamental, since otherwise investors cannot expect any permanent returns (Hecht, 1978). In addition, the housing benefit does not directly influence price formation on the market, supply and demand decisions remain largely undistorted (SVR für Wirtschaft, 2018, 709). The extent to which the lack of obligation to notify the landlord actually applies in practice is a rather theoretical argument against the background of the evidence of income usually requested when applying for a rental apartment. It is conceivable that it can lead to a disadvantage compared to better-off applicants or to an advantage over people with a comparable income but without entitlement. It is also unclear to what extent the current excess demand implies deadweight effects on the landlord's side. However, a functioning rent brake can limit the amount of deadweight and thus state subsidy savings, i. H. Housing benefit savings. Housing benefit as a transitory item would be limited in the payment amount if the tenant remained the same.
The social housing subsidy expands the supply of housing at prices below the market rent and enables households with a housing eligibility certificate to have a housing situation that is appropriate to participation (occupancy retention). While there were around 3 million social housing units in 1990, this number has fallen by more than 50% since then (SVR für Wirtschaft, 2018, 716). However, only 46% of the residents of social housing met the rental criteria in 2016. On balance, the so-called incorrect occupancy rate was accordingly 54% and varied only slightly between urban and rural areas (Schier and Voigtländer, 2016). However, if the allocation of housing were precisely income-related, there would be no social mix. The consequence would be a concentration of lower income groups who would live in isolation, with a number of negative consequences, e.g. B. high unemployment, rising crime, social tensions (Federal Ministry for Economic Affairs and Energy, 2018). Mixing effects in social housing make it easier for lower-income groups to participate in the labor market. This implicitly has effects on employment and wages. Krebs and Scheffel (2017) use model theory to predict increased labor productivity, which will lead to market equilibrium after 34 years, i.e. H. offsetting the deadweight effects through higher tax revenues. This results in increased pay and employment levels.In addition, the competition for the limited resource building land in the allocation to social or private housing remains to be taken into account. The expansion of the subsidized market form directly limits the supply for the private sector.
In June 2019, the German Institute for Economic Research (DIW Berlin) presented hire-purchase as a further alternative to purchasing property. The starting point is the finding that the low ownership rate in Germany goes hand in hand with a markedly unequal distribution of wealth (Kaas, Kocharkov and Preugschat, 2015). In the case of hire-purchase, the property developer would be taken over by the state, which would make advance payments and transfer ownership of the apartments to the (tenant) households via repayments.6 A key advantage would be the decoupling of the rent from speculative price developments, since the hire-purchase payments are comparable to a repayment plan would be fixed amounts corresponding to a comparable rent. From the government's point of view, DIW Berlin believes that the initiative would involve little financial outlay, as it would mainly result in processing costs. In contrast, the initial construction financing would be refinanced through constant hire-purchase payments, and the capital used would also flow back to the state in liquid funds (Gründling and Grabka, 2019).
The hire purchase could have socio-political effects as it implies a reduction in equity capital. For this, however, construction investments linked to rent and purchase would have to correctly anticipate emigration tendencies and vacant regions in order to have an effect that is adequate to demand. Misallocations in fallow housing markets should be avoided, since the investment risk is borne by the state and thus by the taxpayer
The intended market distortions of the hire purchase could equally lead to incalculable consequences. If the equipment and quality are otherwise the same, the state-subsidized hire purchase would be preferable to rent, especially since in the model approach, the interest and repayment installments should correspond to a local comparable rent. The option to purchase real estate (at the rental price) includes a demand-distorting incentive in favor of subsidized objects. Rent-to-buy properties are indeed complementary goods on the rental housing market, but the benefit of these when buying real estate results in a gain in benefit. Compared to simple rental housing, this requires a special justification. This applies in particular if the demand, depending on age, income and equity, is not matched by a corresponding hire-purchase offer. It is open and not clearly articulated in the proposal how clearly rented and rent-to-buy properties (must) have differing standards in order to limit the demand-distorting incentive structure. If market participants with criteria relevant to rental purchase cannot acquire the option on the market, does the private rental housing market compensate for the lack of options for capital formation and retirement provision? Or should the hire-purchase criteria be so limited that excess demand is unlikely? Since the price (rent) should be comparable in terms of model theory, benefit compensation via the housing costs is by definition excluded. Which difference in benefit within the group of those interested in buying should be socially acceptable in a hire-purchase-rent comparison remains an unanswered question
Implications for resolving the shortage of rental apartments in Germany
The housing policy measures solve the supply and allocation problem differently, whereby interdependencies and secondary effects have to be taken into account. The supply problem is caused, among other things, by the limited availability of building land. Due to the expected influence of local interest groups and the resistance of local residents, the simplified designation of building land and urban interior development are confronted with major challenges. The already high price levels in the metropolitan areas would also be included in the costs required for internal development. Against this background, external development appears to be the more practicable alternative. Increased construction costs can be explained primarily by high capacity utilization in the construction industry. Due to the long period of use of apartments, new building capacity in Germany is around 5% of the housing stock (Neitzel et al., 2015). A structural expansion of capacities is not expedient in the medium term, however, since a permanent increase in demand is not to be expected. Another driver of construction costs are increased regulatory standards, but changing these standards will result in conflicting goals.
On the demand side, the supply problem is exacerbated by the increasing per capita consumption of living space. Measures such as A strengthening of the right to sublet, for example, could weaken the effects of singularization, for example by using living space more efficiently through shared apartments. Internal migration from rural to urban areas can be counteracted by developing transport links. It should be noted here that a decentralized residential structure leads to the loss of economies of scale in the provision of public infrastructure. Suburban external development is therefore preferable to rural urban development.
Mix of instruments in housing policy makes sense
An allocation problem also follows from the imbalance between supply and demand, which has led to social discussion. The interdependencies between the two problems indicate the need for an applied economic policy in the form of a mix of instruments. In its current form, however, the rental price brake distorts pricing on the market. With regard to efficiency, the link to a qualified rent index should first be harmonized in such a way that the data is collected uniformly and is comparable across cities.The regular adjustment of the rent index to the price development and the consideration of gentrification should adequately describe a local comparable rent. Due to the socio-politically relevant price-reducing effect in regions with high rental growth, the area of application should be limited to metropolitan areas (Kholodilin, Mense and Michelsen, 2018). On the other hand, the material scope could be extended to furnished equipment. In addition, the relationship between new contract and existing rents should be harmonized. In this way, broader income groups could develop a de facto demand for (unregulated) living space, even if the search for rent-linked apartments was unsuccessful. Under these constraints, the rent brake can have a socio-political impact and go hand in hand with regional savings in housing allowance payments.
Housing benefit does not distort price formation on the market, but its mode of action does not address the increase in available housing either. In the case of high deadweight effects, social housing would also be more effective in terms of distribution policy. The socio-political dimension in the form of an (increase) in renting power from financially weaker households is the primary effect that is socio-politically desirable, but only sufficient to enable broad sections of the population to participate in the rental housing market. Housing benefit is therefore particularly complementary and useful in terms of distribution policy.
In the case of social housing as object funding, the effects in the medium term must be taken into account, i.e. H. Effects of social mix that have a positive effect on labor productivity after a few decades. This secondary effect is contrary to the concept of the incorrect occupancy rate, which implies a flat allocation that is strictly staggered according to income limits. An assessment of property funding based on possible incorrect subsidization therefore falls short of the mark. The hypothesis of blocked housing in social housing, i.e. H. of wealthy tenants as a contradiction in terms of building policy can be weakened by the theory of external effects. By virtue of its nature, social housing creates living space, which makes it a particularly effective instrument in a situation of excess demand, which contributes to solving both supply and allocation problems.
The hire purchase option appears to be lucrative for a group of buyers who are differentiated according to social criteria. If, however, there is no beneficial equivalent in the private rental housing market when it comes to taking advantage of old-age provision and capital formation, demand will be distorted in favor of rental purchase. However, the problem of supply, in which actual living space would be produced, and the allocation efficiency, in that group-specific differentiation and allocation according to socio-political criteria would be addressed. If one also considers the interdependence with social housing, these living spaces could complement the market offer as an alternative option. Rent-purchase and social housing should therefore be used in a complementary manner.
The socio-political will to expand the scarce living space and to make it socially acceptable to broader sections of the population is reflected in the design of the instruments. Supply and allocation problems can hardly be operationalized in isolation, but show interdependencies through secondary and long-term effects that have a complementary or contrary effect on availability and allocation. Actual living space is the necessary condition for allocation improvements, housing allocation depending on normative criteria is a prerequisite for a social housing policy. Solving the supply problem means improving the chances of allocation efficiency.
* We thank the Wolfgang Schultze Foundation - Social Responsibility in the Market Economy for the financial support of this work. All errors and mistakes are the sole responsibility of the authors.
- 1 The new contract rents in Cologne, Hamburg, Stuttgart, Düsseldorf, Munich, Berlin and Frankfurt in 2018 were almost 50% above the prices in 2010 (Deutsche Bundesbank, 2019).
- 2 In the meantime, however, around 40% of households pay more than 30% of their net income for rent excluding their costs (Lebuhn et al., 2017, 69).
- 3 Between 1993 and 2013, the housing cost share of the 20% lowest-income households rose from 27% to 39% (Dustmann, Fitzenberger and Zimmermann 2018, 2).
- 4 In addition, the growth in employment promotes the housing that is in demand in large cities. From 2009 to 2017 there was employment growth of (in some cases significantly) over 10% for Berlin, Düsseldorf, Munich, Stuttgart, Hamburg and Frankfurt (Möbert, 2018).
- 5 The secondary condition of the argument requires annual, region-specific rent increases of at least 3.9% in the four years before the introduction of the rent brake in order to be able to determine a lower rent level as an instrument (Kholodilin, Mense and Michelsen, 2018).
- 6 In 2016, just over 0.5 million households switched from the rental segment to their own property. In urban areas, the rate decreased from 1.6% to 1.2% first-time buyers as a share of all households, while the ownership rate in rural areas increased (Sagner and Voigtländer, 2018).
- 7 It remains unclear, however, whether the repayment installments in the form of rent payments would not already exceed the financial possibilities for low-wage earners and other socially disadvantaged groups (cost rent). The question of an early sale also remains to be explained; Too strict a bond could inhibit mobility. In addition, it would be necessary to explain the handling of possible incorrect occupancy rates in the course of the property acquired by rental purchase under the condition of significant changes in household income. Regulations regarding the loss of property are to be made if payment bottlenecks or defaults occur. The transfer of modernization expenses must also be determined in detail (Gründling and Grabka, 2019).
- 8 Analogous to this, there is the problem of hire-purchase comparisons (passing on additional costs, interest savings), the demand-distorting implications of which would require justification in favor of hire-purchase.
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Title: Shortage of Rental Housing in Germany: Causes, Instruments, Implications
Abstract: The current state of the German rental market for housing is the subject of an ongoing public debate. Over the last few years, an excess demand in urban areas has led to an increase in rental prices. Since the majority of Germans rent, this development affects a large number of households. A set of different housing policy interventions has been provided by the German government that aims to alleviate the disequilibrium. This article analyzes the main reasons for the problem and discusses selected housing policy measures in terms of potential impact. Our conclusion is that a policy mix would be useful in, first, increasing the number of available apartments (necessity) and, second, addressing its distribution adhering to social criteria (sufficiency).
JEL Classification: R31, R38, H54
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