In both the US and Germany, the growing shortage of affordable housing is increasingly reaching into the middle class and impacting broad swaths of society—increasing the pressure on policymakers to implement solutions.
As the US presidential campaign heats up, more and more Democratic candidates are tackling the affordable housing crisis. The common call among Democrats is for increased public spending, though candidates differ on the details: Bernie Sanders has suggested a national rent control policy; Pete Buttigieg has proposed promoting homeownership for minorities who have historically experienced racial discrimination; and Elizabeth Warren has spoken about improving housing access for LGBTQ+ communities who have been unjustly denied housing. Even big tech firms want to be part of the solution: in October 2019, Facebook’s Chief Financial Officer, David Wehner, announced that the company will channel $1 billion over the next ten years into programs to expand California’s affordable housing supply. Among other things, the money should be used to create new units for homeless people and for low- and mixed-income households.
In Germany, too, affordable housing is a growing national challenge. This past April, between 10,000 and 40,000 protestors marched in the streets of Berlin to express their anger at skyrocketing rents and the lack of available housing. In an interview with the news agency Deutschlandfunk, Robert Feiger, head of a leading trade union for the construction sector, described the shortage of affordable housing as “ the big social dynamite for the next ten years.”
In both countries, the shortage of affordable housing is affecting ever greater portions of society—and raising the pressure on policymakers to respond.
In the US and Germany, affordable housing is becoming a middle-class problem
In a Moody's Analytics Report from 2018, American economist Mark Zandi described the affordable housing problem by drawing a comparison to the 2007 financial crisis: “A decade after the housing crash and financial crisis, the nation is still suffering from a housing crisis. A decade ago, the problem was egregious mortgage lending and overbuilding. Today, it is a mounting lack of affordable housing. Low- and middle-income households are struggling to make their rent”
Multiple analyses confirm Zandi’s assessment. According to a recent Harvard University study, almost 38 million US households – slightly more than half of which are renters – meet the definition of “cost-burdened”, defined by the U.S. Department of Housing and Urban Development (HUD) as households that spend more than 30 percent of income on housing. The pressure on low-income households is most acute: in more than 99 percent of US counties, someone working in a full-time, minimum-wage job cannot find an affordable one-bedroom apartment. But increasingly, the situation for the middle class is not much better: in the 25 most expensive cities in the US, 75 percent of households are cost-burdened.
In Germany, the affordable housing shortage is characterized by a large urban-rural gap: as of 2016, there were hundreds of thousands of vacant apartments in rural areas, while the metropolitan supply of affordable housing units lagged behind by roughly two million. In Berlin alone, there is a deficit of over 300,000 apartments. The situation is comparable to the US. Even though in most German cities, the average household fell just below the cost-burdened threshold in 2018, nearly fifteen percent of German inhabitants had to pay over 40 percent of their household income for rent in 2017. According to the Deutsche Bundesbank, rents have increased by about 40 percent since 2010, especially in new rental units in Germany's big cities.
While the exact numbers differ across the Atlantic, middle-income households in both the US and Germany are increasingly struggling to find and afford housing.
Root causes of the crisis are similar in the US and Germany
In neither country is the construction of new housing keeping up with demand. Even though the completion of dwellings is gradually making progress in parts of Germany, the excess demand side in booming regions is not accompanied by annual required completions of apartments, as aimed for by the German Federal Government for the period of 2018 until 2021. So far, between 2016 and 2018 only 283.286 of the annual intended 375.000 were built.
As demand is increasing – especially in cities - market logic responds with increasing housing costs. Slight increases in the last few years of Germany's population and the high influx of people into cities – part of that is an elevated number of students - exacerbate the affordable housing backlog. In the US, new housing construction is on the rise, but it is estimated that it will not meet the annual demand for new housing units as the number of new households grows. Moreover, developers are predominantly focused on building new higher-end housing for markets with greater profit margins—increasing the pressure on households with limited financial resources.
Similarly, in both the US and Germany, public housing has been neglected. In Germany, the amount of social housing units – a number running into the millions – has declined over the past decades. The dilemma: controlled rents in the German social housing system run out after a certain period, which aggravates the availability decline for those in need. Also in the US, there is a decline of over 250,000 public housing units since the end of the 20th century. Moreover, lack of funding to maintain the existing public housing stock means that more units will be removed from the system over time.
Finally, Germany and the US are embedded in a global market that has seen housing transform from a household asset to a financial commodity. In 2017, a report by the UN highlighted the changing trend in global financial markets. It suggests that the problem is not the huge amount of capital flowing into residential real estate but the profit-driven logic of the investors:
“In ‘hedge cities,’ prime destinations for global capital seeking safe havens for investments, housing prices have increased to levels that most residents cannot afford, creating huge increases in wealth for property owners in prime locations while excluding moderate- and low-income households from access to homeownership or rentals due to unaffordability.”
In the early 2000s, in line with global trends, German policymakers created new legal frameworks to allow for more privatization of the real estate market, i.e. investment tools like hedge funds were permitted to operate in the market. In pursuit of fast cash and debt reduction, cities like Dresden and Berlin have also sold large shares of municipally owned housing stock to private investors, real estate groups and investment agencies. Cooperative housing associations, which had long enjoyed special status and helped control rent prices, were opened up for the private real estate markets.
Likewise, in the US, the aftermath of the financial crisis saw private investors and hedge funds buying up foreclosed homes. Today, private investors increasingly dominate the housing market. Real estate has become a lucrative investment, and speculation and quickly increasing rents are becoming the norm. By now, financial investors possess around half of residences that are designed for families. On a single day, the private equity firm Blackstone purchased more than a thousand houses in Atlanta, Georgia. In both the US and Germany, private investors seeking to make investment profits out of residential real estate are increasingly threatening the affordability of housing for the broader public.
Current policy solutions in the US and Germany have also produced mixed reactions
In both the US and Germany, policymakers have sought to increase financial assistance for cost-burdened and disadvantaged households to make up for high rents on the private market. The current German government has decided to increase financial assistance to the tune of more than €1 billion for rental support. The new policy is intended to support 660,000 low-income households. Beginning in 2022, it will be regularly adjusted to meet fluctuations in income and rental costs. Critics argue that the policy will not produce more affordable housing and that it will leave the structural problem of rising rents untouched. In the US, Congress in 2019 approved a financial boost in two similar programs, the Housing Choice Voucher and Section 8 Project-Based Rental Assistance which will likewise increase financial support to renters.
Rent control policies are also increasingly common policy responses on both sides of the Atlantic. The German government recently renewed and extended the so-called “Rent Price Brake” (Mietpreisbremse) for five more years. Established in 2015, it limits rent increases in areas with a shortage of rental properties. Federal states are free to decide – and most of them did – to implement this policy so that rental costs cannot be more than ten percent higher than the regional average. However, apartments rented after October 2014 and those with previously above-average rents are exempt from this rule. The German Tenants’ Association has reacted positively, but still advocates for a nationwide, mandatory implementation. The national association of landlords, meanwhile, has argued that the rent price brake intensifies pressure on rental markets due to the lack of new construction. States like Berlin have also introduced their own, often controversial, rent control policies. The so-called Mietendeckel (“Rent Cap”) could enter into force in early 2020 and would tighten rent limitations for one and a half million residential units in the capital for the next five years. Real estate associations and other more conservative stakeholders argue that such a law would hinder investments and new construction. In contrast, tenants’ associations would welcome such a state-led regulation to battle skyrocketing rents.
On the other side of the Atlantic, rent control is a more familiar policy solution – some municipalities have imposed rent regulations since the 20th century. Today, rent control policies are enjoying new popularity. In March 2019, Oregon became the first US state to pass a rent control law that applies to the whole state. Its new bill stipulates that annual rent increases may not exceed more than seven percent plus the inflation rate. However, buildings less than 15 years old will not be affected by this law, leaving incentives for new construction.
Critics argue that the new policies will de-incentivize investments in new construction and ongoing maintenance. Instead, they argue for reducing zoning and land-use regulations that apply for building new housing units. This is also the Trump Administration’s stance on this topic. In late June, President Trump signed an executive order to launch The White House Council on Eliminating Barriers to Affordable Housing Development. Its primary objective is to analyze the costs of regulatory requirements on building affordable housing and to mitigate these for the construction of affordable housing. The White House has named barriers on federal, state and local levels such as density restrictions, rent limitations or environmental provisions. While many observers across the political spectrum agree on the need to reduce cumbersome zoning laws, President and CEO of the National Low Income Housing Coalition Diane Yentel, argues that the administration’s approach is more likely to focus on deregulating the wrong policies, such as those designed for environmental and social protection.
The affordable housing crisis and its impact on social cohesion
Neither the US nor Germany have found an all-encompassing political agenda to combat the affordable housing crisis. Rather, federal and state governments are experimenting with an array of policies. And political actors are not the only ones trying to find a solution for increasing housing inequality.
Particularly in the US, private corporations are stepping in to deliver philanthropic concepts. Earlier this year, Microsoft announced that the company will invest nearly $500 million in the Puget Sound region to foster construction of affordable homes for low and middle-income households. In June, Google CEO Sundai Pinchai announced that Google would support affordable housing in the San Francisco Bay Area through a financial injection of $1 billion.
In Germany, especially in Berlin, alternative solutions come from grassroots and civil society groups. The initiative Deutsche Wohnen & Co enteignen (Expropriate Deutsche Wohnen & Co) demands a state law for Berlin to transform apartments that are owned by residential property associations into cooperative affordable housing, in exchange for compensation.
Policymakers in both the US and Germany increasingly recognize the immense pressure under which large portions of their societies find themselves in an ever tightening housing market—and the effect this is likely to have on social cohesion. It is no surprise that the issue already plays an important role in the US presidential elections in 2020, and it may also become an important topic in the campaigns for the next Bundestag elections. But despite the growing realization that affordable housing is an increasingly urgent problem for large portions of the electorate, including the middle class, it remains to be seen whether policymakers will offer compelling solutions to address the problem.