Rising rents – solution refused
[This article posted on 8/5/2024 is translated from the German on the Internet, https://www.marx21.de/wohnungspolitik-steigende-mieten-loesung-verweigert/.]

The long-running boom in the real estate market, which has brought fantastic profits to construction tycoons, speculators and housing associations, is over for the time being. The prices of condominiums or even entire apartment buildings have now fallen. But rents are rising all the faster. Jürgen Ehlers explains why this is the case and what solutions there are

From 1950 to the end of 2021, the number of apartments in Germany, if you add West and East Germany together, increased by 173 percent. However, the population only grew by 20 percent during this period. Nevertheless, rents in the last 10 years alone have risen by between 50 percent – as in Stuttgart – or even 100 percent – as in Berlin. While the average rent in 2020 was still 9.50 euros/m², by 2023 it had already risen to 14.46 euros/m², and the trend is still rising. This has devastating consequences.

An ever-increasing proportion of income has to be spent on rent. In 77 major cities in Germany, more than 40 percent of all households had to spend more than a third of their income on housing costs as early as five years ago. One consequence of this development is that people are accepting apartments that are too small. Today, more than 15 percent of apartments in major cities are overcrowded. At the same time, the average living space consumption in Germany is higher than ever, at a good 55 m² per person.

Rents: What's going wrong?
This development shows two things. On the one hand, the stagnating population does not say anything about the fact that there are prosperous, stagnating and declining regions in the country. Since people have to live close to their workplace, the pressure of immigration on the conurbations where new jobs are created continues. Berlin, for example, has grown by 445,000 inhabitants over the past 30 years, and Frankfurt by 130,000. After reunification, about 1 million people moved from East to West Germany because entire regions there had been deindustrialized. Something similar happened in the Ruhr area decades earlier, albeit on a smaller scale. Duisburg, for example, had almost 600,000 inhabitants in 1975, but today there are 100,000 fewer. In all cases, the loss of jobs has triggered people to move away, resulting in vacant apartments in the affected regions.

The deeper cause of this development is the capitalist competitive economy, which, without regard for the interests of the people affected, only allows the law of the economically stronger to apply. The result is a gigantic waste of energy and resources. The apartments that are no longer needed are demolished, even though they could still be used. The housing question cannot be solved under capitalism. But the social and ecological consequences of the destructive profit and competition economy can be reduced.

Building beyond demand
On the other hand, it is clear that the many apartments that have been built in recent years in the prosperous urban centers have been built beyond demand. The aim was not to satisfy a growing need for affordable housing, but to achieve the highest possible returns. The newly built apartments are therefore far too expensive and in many cases they are only investment properties that are always or sometimes empty. The actual vacancy rate is not systematically recorded. If one follows the published projections or estimates, then the vacancy rate in the conurbations is negligible. For Munich, for example, Empirica, a private research institute, puts the figure at just 0.2 percent, as it does for Frankfurt. However, according to a recent microcensus, the city of Munich has around 20,000 vacant apartments, which corresponds to almost 3 percent of the total stock. More than half of these have been vacant for more than a year.

In addition, many apartments in the sought-after old building stock have disappeared, especially in the last fifteen years, as a result of modernization. Smaller apartments have been combined into larger ones after the old tenants have been displaced, as these can be marketed at a higher price. Or residential buildings have been demolished altogether in order to be able to use the property more profitably with a subsequent new development. For Berlin, this meant that in 2022, the 17,310 apartments that were completed this year were offset by 965 apartments that disappeared in the same period. At first glance, this hardly seems worth mentioning, but the apartments that were demolished or merged were usually very inexpensive. Over a longer period of time, this loss then becomes significant.

Profits from rent

In addition, a total of 119,804 rental apartments in Berlin were converted into condominiums between 2015 and 2021. This was not a good sign for the tenants in these apartments. In most cases, they were either threatened with eviction for owner-occupancy or with a hefty rent increase in order to make the capital investment as profitable as possible.

When it comes to new construction, opportunities to maximize profits are also being sought by circumventing legal regulations that are intended to curb rent increases. As a result, one third of new apartments in urban centers are already being offered as "furnished living". This is an easy way to circumvent the limited scope for rent increases when re-renting, which is limited by the local comparative rent. The rents for these apartments are currently around 29 euros/m².

Housing policy in West Germany has always been geared towards offering private investors attractive investment opportunities. This was no different during the heyday of so-called social housing construction after the Second World War. Social housing construction has resulted in the creation of rent-controlled apartments. These were originally intended to provide affordable housing for "broad sections of the population" who were not allowed to exceed a certain income limit. By the end of the 1970s, around a third of the huge subsidies that had been made available for social housing construction from the 1950s onwards went to municipal and state-owned housing associations and another third to industrial companies. They used them to build affordable company housing.

In order to attract private investors and not to jeopardize the returns on the free housing market, it was ensured that the rent control would only apply for a limited period of time. When the rent control expired, the rents could be raised. A social housing unit thus becomes a completely normal rental apartment with a stroke of the pen. This explains why the number of social housing units has been declining for decades. Compared to the past, the construction of new social housing units is now only a marginal phenomenon.

Rents gone mad: no solution wanted

A problem that has political causes and does not follow any natural law. The urban sociologist Andrej Holm summed up this policy very aptly years ago: "At its core, social housing construction is an economic subsidy for private developers with social interim use."

In East Germany, a different approach was taken, but it was also unable to fulfill the promise of sufficient housing. In order to have as much of the scarce capital as possible available for the reconstruction of industry and infrastructure, housing construction for the majority of the population in the GDR was systematically neglected for 40 years. Although housing rents were very low, the volume of new construction was nowhere near enough to meet demand. The old buildings in the inner cities were left to decay, so that the living conditions there continued to deteriorate and apartments ultimately became uninhabitable.
With the end of the post-war boom in the West, the 1970s saw the introduction of a tax policy designed to strengthen the international competitiveness of German companies. Tax revenues fell accordingly. This meant that the federal states and municipalities began to look for other sources of income. From the 1980s onwards, the conditions were created for the gradual privatization of the huge public housing stock.

The low point of this development was the abolition of the non-profit status of housing in 1990. This meant that the important indirect subsidies for housing associations were no longer available. They enjoyed tax advantages if they used the majority of their profits for new housing construction. Since then, there has been no difference in the economic behavior between private and municipal or state-owned housing associations. What counts is the highest possible return on equity. The old stock of social housing created the optimal conditions for this. For example, around 4.8 million social housing units were built in West Germany between 1949 and 1989. In 2022, there were just under 1.1 million of them left in the whole of Germany.

High rents despite low costs

When rents in these former social housing units can be increased after the expiry of the rent control, the owner's return on equity increases sharply. This is despite the fact that rents can initially only be increased in relatively small steps – currently between 15 and 20 percent every 3 years. However, when a new tenant is found, the rent is immediately based on the rent index and threatens to double.

The crucial point, however, is that at this point the costs of financing the construction, consisting of interest and amortization, no longer apply. Together, these make up more than half of the total ongoing costs. How profitable a rental is does not depend solely on the absolute costs. What is more important is the terms on which these are financed. And the ratio of the resulting costs for interest, amortization and depreciation to the rental income. If the costs for interest and amortization are eliminated because the loans have been paid off and the rents increase after the fixed rent period has expired, then profits skyrocket.

This explains why most housing associations that are still owned by municipalities or the state post huge profits every year. Their stocks of former social housing were therefore aptly characterized by the head of the German Association of Housing and Real Estate Companies in 2006 as "gold mines".

Concrete gold and a speculative bubble

The ECB's low interest rate policy has not solved the financial and economic crisis. Instead, it led to a flight into concrete gold in urban centers from 2009 onwards. The real estate industry was able to calculate with historically low financing costs in the planning and construction phase. At the same time, the purchasing power of its customers increased because they were able to afford higher loans to buy apartments. As a result, high-priced condominiums and terraced houses were built. Shortly before, the SPD had ensured that tax advantages were granted to real estate funds traded on the stock exchange. The aim was to make the purchase of public housing stocks even more attractive to internationally operating real estate funds. Germany's largest real estate group, Vonovia, also owes its meteoric rise in recent years to the privatization of public housing stocks.

Low interest rates have thus created a speculative bubble in the real estate market. In the USA, the bursting of a speculative bubble in 2008, with the collapse of the investment bank Lehman Brothers, triggered the worst financial crisis since the stock market crash of 1929. The bubble in Germany is only slowly deflating for the time being. While the prices for buying apartments or multi-family houses are falling, rents for apartments continue to rise rapidly. Many owners are trying to compensate for the consequences of the increased costs of construction financing and construction services in this way. In their eyes, this is only insufficiently successful, so that their return expectations are not met. As a result, even approved construction projects are not being realized. Many families who have bought an overpriced terraced house in the countryside will also have a rude awakening when the cheap loan expires and has to be replaced by a more expensive one.

What is needed

The federal government's promise to build 400,000 apartments every year – 100,000 of them as social housing – has also fallen victim to the end of the low interest rate policy. Only 20,000 social housing units were built in 2022. The current catastrophe in the housing market shows once again that when it comes to the supply of affordable housing, there is always a loser in the game of supply and demand. These are the "broad sections of the population". In large cities, half of all households are now entitled to a social housing unit, but they cannot claim it. The new non-profit housing policy now adopted by the federal government is only a drop in the ocean. According to the Ministry of Housing, it will initially enable the construction of 105,000 apartments with rents between 6 and 8 euros. Measured against demand, this is hardly more than nothing. On the positive side, the rent control is not to be limited in time, a demand of the tenants' movement.

A housing policy that does justice to the dramatic situation on the housing market must look very different. This includes a ban on leaving housing empty and compulsory housing management to ensure that this housing is permanently allocated to people looking for accommodation. It also includes a general rent freeze. Furthermore, social housing must be subject to rent control on a permanent basis. For apartments that have already fallen out of rent control, the rent must be reduced to the original level. The municipal housing in Vienna can serve as a model here. For almost 100 years, it has ensured that municipal apartments are always subject to rent control. This ensures a comparatively relaxed housing market in the metropolis today.

The more far-reaching solution is not to subsidize the construction of social housing in the first place, because the banks make a lot of money from it. A great potential for savings lies in eliminating the capital market by having the municipalities finance the construction entirely from their own funds – a concept that was developed 50 years ago by scientists at the renowned Institute for Housing and the Environment (IWU) in Darmstadt, when 150,000 social housing units were standing empty in West Germany. However, this was not the result of oversupply. The very high capital market interest rates at the time made such huge subsidies necessary to make rents affordable that the tax revenues provided were not enough. This showed once again that the market – in this case the financial market – is not a suitable instrument for creating affordable housing.

Tenants' movement

The catastrophic situation on the housing market has repeatedly provoked resistance from tenants. They try to defend themselves in "house struggles" against being evicted from their apartments and constant rent increases – sometimes with small successes. These are important in order to sustain and endure the struggle for an affordable roof over one's head, which is usually very protracted. So far, however, it has not been possible to turn the isolated struggles for houses with still affordable living space or even entire settlements into a broad tenants' movement. Unlike the trade union movement, tenants cannot exert economic pressure. As a result, major successes are few and far between, and widespread defeatism can only be overcome for a short time.

The campaign "Deutsche Wohnen & Co. Expropriate!" in Berlin is also suffering from this. It has been very successful in collecting the necessary signatures for a referendum calling on the Senate to initiate the expropriation of housing companies. The campaign has rightly received nationwide attention and sympathy. The demand for socialization has struck a nerve with the many tenants who feel at the mercy of their landlords.

The Berlin Senate was able to sit out the result of the referendum without any danger. Although the campaign was supported by a broad alliance, it did not succeed in getting the many supporters onto the streets for demonstrations and rallies after the collection of signatures had ended. This is a prerequisite for giving the demand for socialization the necessary emphasis.
Collecting signatures can have a mobilizing effect if it is combined with the call for people to take action themselves to enforce demands. If this does not happen, the signature given takes on the character of a vote. Just like in an election to a parliament, with the well-known consequences for the enforcement of one's own interests.