Why has social housing in Germany become more expensive than private housing?

Lucie LECHEVALIER HURARD, 2008

Association Internationale de Techniciens, Experts et Chercheurs (AITEC)

Contrary to what might seem obvious, social housing in Germany is not characterized by its affordability for the poorest. On the contrary, because it is mostly new housing, but also because of the evolution of the public financing system, social housing has become an expensive sector.

The article The private sector of public utility housing in Germany allowed us to understand that «  social housing  » in Germany is in fact composed of three independent branches, animated by actors of different natures

• cooperatives and foundations,

• communal housing companies

• and private housing in temporary social use.

It is the third branch of social housing that will be discussed here. It is of interest to us because it is this branch that provides German social housing with one of its characteristics: social housing is mostly new housing.

New, modern and… expensive social housing

By definition, social housing in Germany is new because it is only social insofar as the landlord has obtained public subsidies for its construction. Once the subsidies have been repaid¹, the housing concerned leaves the social sphere. It is replaced in the « social park » by new housing.

The majority of the housing built from the 1960s onwards is affected by this system of subsidies and temporary social renting.

This particularity of German social housing leads to the fact that social housing is on average and « by nature » more modern than the rest of the housing available on the market.

While the older buildings are still heated with coal and the sanitary facilities are shared with the upstairs neighbors, all new social housing has central heating and all amenities. As the years went by and the standards of modern comfort were constantly changing, they were gradually equipped with balconies, underground parking, etc.

Social housing is more modern… and therefore more expensive.

This paradox, which could be an unexpected and perverse effect of the system, is in fact quite assumed. Social housing is essentially intended for «  the broadest strata of the population³ " : it does not therefore specifically concern the most deprived people.

In fact, the provision of housing for the poorest households should be ensured indirectly by a «  cascade effect " : as the middle classes move out of their homes into modern social housing, they should free up space in the older, much more affordable housing stock.

Social housing is therefore inherently more expensive than older, non-renovated housing. But there is another factor that has led to the social sector becoming significantly more expensive : changes in legislation on social rent setting.

Economic rent… and its explosion

Social » housing, that is, housing which has received public support for its construction, is subject to the economic rent law (Kostenmiete). The economic rent is fixed on the basis of a profitability calculation. The rent paid by the tenants may not exceed the amount of the interest on the capital loan for the construction.

Since the State provides aid for construction in the form of zero-interest loans or very low interest rates, the only thing left to pay for the tenant is the cost of the external capital, borrowed from banks to complete the real estate operation. The rents are therefore very low.

Evolution of the economic rent modalities

However, from the beginning of the 1970s, the State decided not to grant loans directly⁴, in order to bring the social housing sector as close as possible to the traditional market players. It therefore refers landlords to traditional loans, provided by banks, at much higher rates.

In order to maintain rents affordable to low-income tenants, the state enters into contracts with the landlords : it finances the landlord for 15 years⁵ the difference between the economic rent (the effective cost of the loans made for the construction) and the political rent, acceptable to low-income households, according to a decision made by the public authorities.

For example, if the local government sets the level of a «  reasonable  » rent in Berlin at €5 per square meter, it will have to pay the lessor⁶ the difference with the effective cost of capital, which amounts to €20 per square meter.

The state’s contribution is gradually reduced over the years, leaving the tenant to pay a larger part of the rent. At the end of the 15-year contract with the State, the public authorities consider that the rent paid by the tenant must have come close enough to market prices to be included in the system of regulation of classic rents (the comparative rent).

The explosion of costs

This system has harmful consequences, since it encourages a significant increase in the overall prices of the sector: since the public authorities bear the costs, all the actors in the sector ⁷ have an interest in seeing construction prices, credit costs, etc. increase.

This leads to an explosion in public spending on housing policy.

Originally, the 15-year contracts could be renewed, based on a vote of the parliamentarians, thus perpetuating the State’s commitment over very long periods. These renewals were voted without any difficulty until 2003.

From that date on, the parliamentarians decided to no longer accept contract extensions: at the end of the 15-year commitment, the State withdrew completely from the financing of the rents.

Tenants protected by… the market

Rents then « theoretically » exploded: landlords could in principle demand that their tenants pay the full amount of the cost of the loan, which had previously been partly covered by the State.

But these costs were so high that the tenants would never have been able to pay such sums and would have left the housing they occupied instead.

It is therefore only because the German rental housing market is not as tight as it is in other countries that social tenants have not seen their rents soar.

The situation is therefore paradoxical: tenants are more protected by the market itself than by state intervention in the form of support for the social sector…

But as real estate pressure begins to increase, it is unclear what the future may hold for social tenants…

This particular system of social housing, with its modalities that have evolved over the decades, has thus led to strange consequences : the publicly subsidized housing (thus social housing) sector has often become more expensive than housing in the private sector !

Older buildings, especially unrenovated buildings, are still often more affordable for low-income households than new publicly subsidized housing.