In Urban Centres, the Construction Sector Will Benefit Most from this New Scheme

Who will the winners and losers be?

The new scheme is intended to offer equal support to families with children all over Germany, regardless of where they live. However, this means that households in rural areas will benefit more from this funding than households in urban areas where property is much more expensive. A family with two children that meets the criteria for Baukindergeld and wants to buy a house in rural Thuringia, where you can buy a detached house for 25,000 euros, will receive the same 24,000 euros in funding as a family looking to buy in the suburbs of Munich, where single-family houses sell for almost 900,000 euros on average. In the case of the first family, the government grant will cover almost 90 per cent of the cost of a house, for the latter less than three per cent. Furthermore, property prices in cities will continue to rise due to the shortage of housing, with the potential buyers’ willingness to pay rising thanks to funding they receive, a fact which property developers may take advantage of by raising their sale prices. As a result, it is the construction sector that will likely end up benefiting the most.

In rural areas, however, Baukindergeld should encourage new construction projects due to the large amount of land available for building. The vacancy rate in these areas is, however, already very high. Moreover, the scheme involves placing a burden on low earners who cannot afford property themselves, but who will be forced to indirectly finance the property-owning ambitions of other, generally better off, families through their taxes.

The government has set itself the goal of building 1.5 million new homes over the current legislative period. Is Baukindergeld a step in the right direction to achieving this goal?

For a start, Baukindergeld is a means of driving up demand. However, the scheme cannot do much to change what is happening on the supply side, at least on the strained housing markets. For some time, not enough land in urban areas, which could be used for desperately needed residential buildings, has been earmarked for construction. In many municipalities, building plots are also being sold off at sky-high prices. In such cases, construction firms do not have much choice but to try and recuperate these costs by building expensive luxury apartments. These apartments, in turn, meet the demand from families who do not qualify for funding like Baukindergeld because their taxable income is well over the maximum threshold. Consequently, new houses are likely to be built primarily in rural areas where there is no great need for them. Due to the lack of land zoned for construction in urban areas, it also seems more likely that more rented properties will be turned into condominiums, pushing prices up even further.

Critics of the scheme point to the significant drain on the national budget. How else can the government encourage the construction of new homes?

There are other ways to ease the burden on families than through Baukindergeld. One option would be to reduce land transfer tax, which in some federal states amounts to as much as 6.5 per cent of the purchase price. This is a much higher rate than in other countries such as Denmark, Sweden, Austria and Switzerland, where buyers only have to pay between 0.6 and 3.3 per cent. Applied at a standard rate of 3.5 per cent across all of Germany until 2006, the tax has been repeatedly raised by the majority of regional governments over the last ten years. Baden-Württemberg, for example, raised the tax rate to 5 per cent, meaning that a family with two children buying a detached house in Mannheim for 600,000 euros has to pay an additional 30,000 euros in tax. If they were to apply for Baukindergeld, they would only receive a maximum of 24,000 euros in funding over ten years. Purchasing a house also comes with further costs, such as notary fees, land register entry and, in many cases, estate agent fees. In the case of estate agent fees, it has often been suggested that the “orderer principle” for rented properties – that is, whoever contracts the agent, pays the brokerage fee – also be applied to property sales. There is, however, a risk that the seller will add these costs to the purchase price, which is then used as the basis for calculating the land transfer tax. In the Netherlands, for example, where the “orderer principle” also applies, such price increases have not been observed, largely because the average estate agent fee is only around 1.5 per cent. We should still be cautious, however, since – in the worst case scenario – this principle can make purchasing property even more expensive for buyers. Best case scenario, as was the case in the Netherlands, it can foster competition among real estate agents and lower brokers’ fees, since sellers then select their broker more carefully and negotiate prices in advance.

How are other EU countries dealing with housing shortages?

It is generally a lot cheaper to build in many EU countries than it is in Germany. This is due to less strict building regulations, such as those relating to energy consumption, noise control and the number of floors. Another factor are the comparatively low additional costs associated with buying a home. While buyers in Germany can expect to pay an additional 13.5 per cent on top of the price of the house or apartment, buyers in France and the Netherlands only have to pay an extra seven and eight to ten per cent, respectively. This makes buying property in other countries much more affordable. In other EU countries and in the US, people also move more often, starting small and working their way up the property ladder, before moving back into a smaller apartment after retirement. This means that large apartments suitable for families are not occupied by couples or single adults. The high additional costs associated with moving in Germany make it practically impossible to move home this often. Germans also seem to find it difficult to sever the emotional bond with their homes. Couples with children who have fulfilled their dream of owning their own home tend to stay in the same house for the rest of their lives. As a result, once they have retired and their children have long since moved out, they end up living in a house that is far too big for their needs. Ideally, they should downsize and make room for a family who really needs the space. Our neighbours in other countries seem far more willing to take this step.