Is home ownership really the cornerstone of a strong economy?


Recently the Senate Inquiry into Affordable Housing reinforced Australia’s cultural attachment to home ownership. The committee said that although affordable rentals are crucial, home ownership should is still the preferred type of tenure because other social benefits flow from it. Another inquiry has just been announced into affordable home ownership. Yet home ownership is not the only solution.  Germany, Europe’s strongest economy, where unemployment is at 5.2%, has a home ownership rate of 45% which is the second lowest in Europe. So why do so many Germans rent?

In part, the cultural lean towards renting in Germany goes back to post WWII, when much of the country was razed and the government had to intervene to house the population. From that experience, housing in Germany has evolved to be seen as a public resource first and a speculative investment second. Interestingly Britain faced a similar problem at the time, but some economists believe the German government struck a better balance between public involvement and private investment which is why Britain has much higher ownership rates (around 68%).

Clearly Australia has a very different history which has led us to become more culturally focused on home ownership.  But Australian governments could learn something by looking at the German policies that help keep rents transparent and affordable, especially if they are keen to take the Senate Inquiry’s advice seriously and start seeing renting as a mainstream form of tenure. They key policies include:

  • The Mietspiegel or ‘rental mirror’: this is an index specific to each region that shows what average rents are for various types of dwellings.
  • Caps on rental increases: rents are not allowed to rise by more than 15% over three years
  • Taxation doesn’t encourage ownership: in Germany, investors cannot deduct mortgage interest payments from their tax, making investment in property less attractive and therefore the market less speculative

By now you’re probably thinking that Germany is something of a housing utopia, but it’s not without problems. After rents started to climb a few years ago in tight markets like Hamburg and Berlin, the government intervened and later this year a ‘rent brake’ will be applied to these markets. The brake will mean new leases cannot be more than 10% of an equivalent property in the area. It sounds good, but economists are concerned about the impact it will have on the market, for example providing a disincentive to repair rundown buildings, and the creation of a black market where people are willing to pay more than the brake allows.

The housing market in Germany isn’t perfect. However, when housing is culturally understood as a public necessity first and foremost and policy makers work to reflect that, it’s not a bad place to start.