ifo Viewpoint 259: What Can Be Done About the Housing Shortage?
The German housing market is under significant strain, particularly in urban areas where finding rental apartments has become increasingly challenging. One common indicator of housing scarcity is the percentage of households living in overcrowded conditions. Statistically, a dwelling is considered overcrowded if it has more household members than rooms.
In 2013, 10.4 % of households in Germany’s urban regions lived under such cramped conditions. Since then, this figure has steadily risen, reaching 16.6 % in 2023. Many households living in overcrowded conditions would like to move but cannot find suitable apartments. In addition to the overcrowding rate, other signs of housing scarcity exist in the market. Many people need new apartments because they are relocating for jobs. It is not uncommon for job offers to be declined solely due to the difficulty of finding housing.
Economic Implications of the Housing Shortage
Economically, the housing shortage has a dual impact. Housing is a fundamental necessity, and successful economic development requires people to work where they are most productive. Structural changes are creating new opportunities for value creation, especially in urban regions, where the availability of housing is crucial. Without adequate housing, these opportunities cannot be fully realized.
A functioning housing market would typically be expected to address these challenges. Housing shortages and rising rents should ideally incentivize investors to build more housing or convert owner-occupied units into rentals.
However, rents respond only modestly to these changing scarcities due to rent controls, rental caps, and other regulations that tightly limit increases, particularly for existing leases. This hampers the overall efficiency of the housing market. Individuals living in apartments that are too large for their needs hesitate to move because the rent for a new lease is likely to be higher than their current rate.
Additionally, rent controls reduce the attractiveness for investors to develop new housing and lead them to convert rental units into owner-occupied apartments. A study by the ifo Institute underscores that the Berlin rent cap, later deemed unconstitutional, significantly reduced the availability of housing.
Policy Recommendations
Could deregulating rents, including existing leases, be the solution to the problem? Critics argue that significantly rising rents would overwhelm low-income earners. However, this issue can be managed. Policymakers can support vulnerable households with income-dependent transfers such as housing subsidies. This approach can address dysfunctions in the rental market without creating social imbalance.
There is, of course, a second issue at play, which is political-economic in nature. Existing tenants, comprising about 58 % of households in Germany, form a potent interest group regardless of income. Relaxing rent caps would disadvantage this group while benefiting landlords. Existing tenants already have housing, so they have significant incentives to resist deregulation, which would primarily benefit those searching for housing. Therefore, political decision-makers tend to regulate rents, even though they understand it exacerbates the housing shortage.
What else can policymakers do? To promote housing construction, incentives such as special tax deductions make sense. These are included in the Growth Opportunities Act but could be expanded further. Secondly, reviewing building standards is crucial to reducing construction costs. Thirdly, building permits that administrations fail to process within a deadline should be automatically approved and, fourthly, more land should be designated for construction. And if there is no willingness to relax rent controls, it might be worth considering enhancing tools for enforcing rent payments. After all, potential investors in the German housing market are deterred by the difficulty of enforcing rent payments or evicting non-paying tenants.
Lastly, landlords could also contribute by offering a bonus to existing tenants in very large apartments if they move out, thereby making room for young families. If landlords could then charge higher rents for new leases, all parties involved would benefit.
Clemens Fuest
Professor of Economics and Public Finance
President of the ifo Institute
Published under the title “Die Wohnungskrise ist lösbar!” WirtschaftsWoche, June 7, 2024