Lessons from German Housing?
by Ken Gibb
IPPR has recently been producing a series of reports on housing in Germany asking why can’t the UK follow in its stead and take on some of the apparently desirable features of their housing system. As with other examples of policy transfer, diffusion or mobility, I don’t think it is always as straightforward, though IPPR are demonstrably aware of either the barriers to transfer or that we do need to look closely and critically at the German system as well as positively regarding certain undeniably positive outcomes.
What do IPPR say in their reports? The first one says why is it that Germany builds more homes, has a less volatile housing market and a bigger private rented sector? The second report, out last week, describes renting (i.e. the PRS) as the dominant tenure, more stable and with greater rights than for those in England. Since 1995, and with much lower levels of volatility, German house prices have risen by 50%; in the UK they have gone up 400%.
IPPR argue that greater levels of housing construction are associated in Germany with a wider range of builders, both SMEs and larger firms. Ostensibly similar (a plan led system like in the UK), Germany seems to do better at converting planning permissions into new supply (i.e. the housing delivery system) but they have also seen a significant reduction in the volume of affordable housing being constructed. Perhaps more significantly, German public authorities are more proactive in the land market assembling sites and delivering infrastructure. Unlike the English, they continue to use planning gain to support the development of affordable housing. The lending environment is more conservative than the UK and mortgage debt to GDP is considerably lower. While the housing tax regimes are not dissimilar, the German system of capital gains tax encourages long term property holding rather than speculation.
Interestingly, the IPPR conclusions include what they call mis-steps that should be avoided in the UK: first, they argue that a model of long term covenants (20-30 years) has failed to deliver more affordable units and second, they argue that there are higher transactions costs and inflexibilities that may impact negatively on the labour market.
Turning to the second report on private renting, IPPR stress that alongside security of tenure, private rents in Germany are much less likely to be associated with housing stress or very high housing cost to income ratios. Germany has a large supply of rental properties (which helps reduce the impact of longer tenancies on the supply of vacancies and this is supported by rent controls and a further control or brake on rents when properties are re-let. Not surprisingly, in such a different tenure distribution, tenants are also organised politically and have voice in a way that does not exist in the UK. This leads IPPR to recommend for the UK that: government should let LAs construct build-to-let schemes as part of the PRS and also recommends longer tenancies if public subsidy is involved.
The reports are worth reading and make excellent points. However, one must recognise the universal challenges of lesson-learning, transfer and diffusion of policy across national boundaries where market contexts, institutional settings and the evolution of housing systems move differently. Germany has more than half of its households in private renting but the institutional features of the PRS in Germany are quite different, as we have seen, from the deregulated UK. The benefits of the system stability and much more moderate volatility have taken decades to achieve and have had to overcome the challenges of reunification and surplus low demand social housing in the East. They have also enjoyed a comparatively stable policy framework without the catalogue of initiatives and innovations that we suffer from.
Yes, it is true that they do not meet their housing need targets and affordable housing completions are moving in the wrong direction. It may also be the case that the German mortgage market is more conservative and it is undoubtedly true that their rental market (by definition) is less flexible than that of the UK. But this may be an acceptable trade-off in terms of overall housing policy outcomes?
The point about the mortgage market is interesting for other reasons. Recently, in the House of Lords Economics Affairs Committee inquiry into housing, Dame Kate Barker made the point that there is a massive tension between housing-related government departments trying to boost housing supply and home ownership while, at the same time, HM Treasury, the Bank and the financial regulators are re-regulating and constraining mortgage lending. Acknowledging this difficult trade-off and trying to develop the right balance is a critical requirement for housing policy and the forthcoming White Paper on housing.
I think these reports are a fundamentally good idea because it is by looking at other places in some depth that we shed light on some of the things wrong with our housing system. However, apart from one references to legislating over letting agency fees, I was a little surprised that IPPR did not make more reference to Scotland, given that we have just undergone fundamental reform to our tenancy laws (creating open-ended tenancies and limited specific routes only for eviction) and also proposed rent uplift limitations in pressured market areas. It is Ironic that there appears to be less interest with intra UK policy diffusion. After all while housing policy is diverging rapidly across the UK, it is nonetheless much more similar than comparisons made with Germany. Although it is early days and the law is not yet in force, considering reform along Scottish lines might be preferable to the IPPR proposals suggested above which are premised on retaining the present tenancy laws and hence privileging, it seems to me, labour market flexibility over housing security.