Last time, I profiled Japan’s housing success. This time, I focus on Germany, which achieves similar feats through different means.
If Cascadia has a European cousin, it’s Germany. Cascadia and Germany both tend to the serious and practical, not the flashy or fashionable. Both are more nature-loving than God-fearing. Both display a marked fondness for beer and mountains. And both are powerhouses of engineering, making products that dominate markets worldwide.
Yet for all the harmonies between these far-off cousins, one difference jangles like a broken guitar string. Germany has a housing economy that provides an abundance of affordable dwellings for its people in compact, low-carbon neighborhoods. Cascadia, for its part, suffers an enduring housing shortage and resulting high prices; its homebuilders are walled out of most neighborhoods, unable to construct enough apartments, rowhouses, and other dwellings for its fast-growing population. Cascadia’s dearth of housing entrains a litany of woes, from worsened traffic to displaced minorities, from forgone prosperity to climate pollution.
How does Germany do it? Not the way Japan does. Japan’s lesson, as I previously wrote, is that pushing power to higher levels of government is a tonic for housing. It counteracts NIMBY obstructionism. Germany’s lesson is that decentralized control can be fine, as long as local authorities have strong incentives to welcome homebuilding. Already, Sightline and others are trying to put this lesson into practice in Cascadian capitols—but I am getting ahead of myself.
Germany’s success is doubly important because Germany is a better analog for Cascadia than Japan. Japan has one of the most centralized governments in the industrial world, while Germany governs itself more as Cascadia does, through a decentralized system that corresponds to the states, provinces, counties, regional districts, and cities of Cascadia in the United States and Canada. Germany is not as decentralized as North America overall, but it’s similar to Cascadia’s most populous jurisdictions of British Columbia, Oregon, and Washington. All have land-use planning systems, for example, where localities are expected to harmonize their plans with those of higher levels of government through processes of review and consultation.
Modest prices, extreme stability
“The German system [of housing] is the best in Europe,” says Paul Cheshire, emeritus professor at the London School of Economics and a leading housing scholar. Housing is dramatically more affordable in Germany than in hot housing markets elsewhere in Europe or North America. It’s more like Houston than Cascadia’s high-priced cities.
Beyond its modest price and rent levels, Germany also stands out for the stability of its housing costs: they’re uncannily, freakishly stable. As illustrated in the figure below, residential prices in Germany have changed little in the last 45 years, never varying by more than 21 percent from their 1995 level. Straight through German reunification, European Union expansion, and the 2008 global financial crisis, German home prices stayed the same. Germany’s housing economy is the most stable around, rivaled only by Japan. Germany’s housing prices are more stable than any other country in the Dallas Federal Reserve Bank’s dataset (from which the figure is drawn), or the Economist’s larger dataset, or the International Monetary Fund’s even larger one.
German housing isn’t perfect, of course. Prices have edged upward in recent years. The country has suffered a shortage of construction labor since the housing crash of the late aughts, while its urban population has grown quickly, as young Germans, immigrants from elsewhere in the Eurozone, and refugees from abroad have flocked to cities. Germany has fallen behind its own homebuilding goals. Like home prices, rents in new buildings have climbed more in the past decade than in previous ones, although rents in existing buildings have not. Carolin Schmidt, a scholar of German housing at Cambridge University, finds plenty to criticize about German housing policy, but when comparing the country to its peers, she simply says, “Germany has enough housing! It’s just not all in the right places.”
Still, if not perfect, Germany’s housing economy is a model with much to offer Cascadia.
The main explanation for Germany’s exemplary record of affordable, stable housing is that the country encourages homebuilding, lots of it. Germany is a juggernaut of adding apartments, rowhouses, and other homes. From 2010 to 2019, for every hundred people added to Germany’s population, the country gave permits for construction of 97 homes. That’s right: Germany permitted almost as many new homes as it added residents. In the same period, for every 100 additional people living in the five Cascadian states (Alaska, Idaho, Montana, Oregon, and Washington), the region awarded permits for the construction of just 42 new homes: one new home for every 2.4 extra people. Adjusted for population growth, Germany permitted more than twice as many new homes as Cascadia.
What’s more, Germany’s homebuilding accomplishment came in a decade when the country’s building rate was slow by its own standards. Germany built more than twice as many dwellings in the 1990s, for example. In Cascadia, mired in local zoning restrictions, homebuilding has lagged behind population growth for decades, leaving states such as Oregon and Washington with acute housing gaps. To match Germany’s record, Cascadia will have to ramp up homebuilding significantly. To match Germany not only in homebuilding but also in low-carbon living, Cascadia will have to build those homes in existing neighborhoods, inserting hundreds of thousands of rowhouses, duplexes and other “smallplexes,” and apartment buildings as “infill” into built-up areas. These forms of middle housing make up most of Germany’s housing stock.
Lesson: Incentivize cities!
Japan is the paradigm case of one political path to abundant housing: “enlarge it!” In Japan, centralized national control over housing and zoning has yielded cities with so many modest homes in transit-centered, low-carbon neighborhoods that rent has been flat for decades. Germany gets similar results without a centralized authority writing the zoning and building codes. Instead, it’s the paradigm case of the second political path for winning abundant housing: incentivize cities!
Germany does not mandate that its cities welcome homebuilding. It makes doing so worth their while, by tethering their revenue directly to how many residents they have.
Thiess Buettner, professor of public finance at Friederich-Alexander University in southern Germany and an advisor to the German Ministry of Finance, explains that Germany’s century-old system of fiscal equalization among the states gives localities a stake in providing abundant housing. The system distributes state funds according to a formula in which population is the main factor. Most localities get more than a quarter of their funds from equalization grants, and many of their other revenues also grow directly with population size. For example, heavily populated localities get a bigger share of their state’s value-added taxes than less populous ones.
Local German officials, like local leaders everywhere, seek bigger budgets to provide more and better services to their constituents. What’s different about Germany is that the way to get bigger budgets is to increase local populations. And, as Professor Buettner says, “Ultimately, to get people, municipalities will need to support housing.”
The result is a system of incentives that is the opposite of “fiscal zoning”—the US practice of zoning land in ways that maximize local governments’ income and minimize their costs. In places with high sales taxes, such as Washington State, leaders zone more land for shopping centers. In places where residential property taxes are capped, such as California, they zone less land for homes and more for offices. In affluent suburbs, they often zone land for houses on large lots, excluding low-income people.
Maximizing property values is such a central concern of local government in the United States that Dartmouth economist William Fischel developed the notion into an entire political theory. His “homevoter hypothesis” holds that local governments are almost single-mindedly focused on maximizing real estate values, because homeowners typically vote their home values in local elections. German jurisdictions gain financially by maximizing population, not house values, and because renters outnumber homeowners in the country, homevoters are not the dominant electoral force in local German elections. Renters are.
Tenant-voters and rent control
Not surprisingly for a nation of tenant-voters, Germany has strong pro-tenant rules. Leases are open-ended, not time-limited, and they are much easier for tenants than for landlords to terminate. During a lease, rents can only rise slowly, typically at the pace of inflation, which has an effect almost like nationwide rent control. Rent regulation is much stricter in tight urban markets that have low vacancy rates or fast rent increases. In these places, local rent-control systems are sometimes elaborate and induce the usual kinds of unintended problems for tenants, according to Konstantin A. Kholodilin, a researcher at the German Institute for Economic Research: under-building, conversion of apartments to condominiums, a tendency for tenants to stay indefinitely in dwellings that are the wrong size or in the wrong place, and an active black market in leases in the form of bribes known as “key money.”
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Still, rent control is only a moderate flaw in Germany’s housing system overall. Even in some large German cities, such as Hamburg, it is not a substantial threat to housing abundance. Hamburg has responded well to the population influx of the last decade, accelerating apartment construction and avoiding price spikes. Berlin, in contrast, slow-walked construction and doubled down on rent control. In 2019, it froze rent for five years and imposed an absolute cap on rent, even in new buildings, even requiring existing leases that exceed the cap to lower their rents. The law went far—too far for the German high court, which threw it out in April. The point, though, is that Berlin is an outlier in Germany: the exception, not the rule. Most German localities welcome new homes, because their budgets depend on them.
Germany holds additional lessons too (which you can read about here or skip ahead):
In Germany, as across most of continental Europe, homebuilding is “by right” rather than discretionary. That is, local authorities must grant permits to construction proposals that check all the boxes in regulation. Local authorities cannot simply refuse conforming applications, as they routinely do in much of the English-speaking world. Cascadian permitting is closer to by-right than much of North America’s permitting, but it’s often arbitrary, as anyone can tell you who has attended a design review meeting in Seattle. Cascadia can emulate Germany by permitting housing by right.
German localities have a legal obligation to provide enough land for housing in the local plans they draft, and those plans must pass review from higher levels of government. In Cascadia’s largest jurisdictions, unlike in much of North America, planning requirements ostensibly do the same. Growth management systems in Oregon and Washington, for example, require localities to meet projected housing needs, provide enough “zoned capacity,” and defend their plans before state review boards. Unfortunately, perhaps because they’re not motivated financially as are German municipalities, Cascadian localities routinely underzone for housing. Cascadia can benefit from Germany’s example by fixing its upzoning procedures.
Germany runs the banking and financial side of its housing economy differently than do the United States and Canada. It requires 20 percent down payments for mortgage loans, and it regulates banks conservatively, scrutinizing speculative practices such as mortgage securitization. It aggressively deflates asset bubbles in its macro-economy and casts a gimlet eye not only on real-estate speculation but even on real-estate appreciation. Germany’s housing system may be the closest thing in the industrial world to one that is designed to house people rather than boost home equity.
Germany’s tax system, unlike those in North America, is neutral between owning and renting a home. The United States subsidizes residential real-estate speculation through the tax code in three unusual ways: the mortgage interest deduction, the property tax deduction, and the capital gains tax exemption. (It also exempts imputed rent from taxation, as do nearly all other countries except Switzerland.) It shrank these three subsidies in 2017, but they still lavish perhaps $67 billion a year on homeowners. Canada provides no mortgage interest deduction and a limited property tax deduction, but it has a much more generous capital gains tax exemption than the United States. Germany, meanwhile, gives none of these tax advantages to homeowners.
Germany does give a raft of tax advantages to those who invest in rental housing on a small scale. Nonprofessional landlords can deduct their mortgage interest on rental properties, along with many of their operating expenses. For new dwellings that they commit to leaving in the rental market for the long term, they can even save on their taxes by deducting their investments on an extra-fast timeline, called “accelerated depreciation.” Consequently, the nation’s rental stock is huge, housing 54 percent of residents. Some 60 percent of rental dwellings are owned by mom-and-pop landlords, many of whom rent out dwellings in the same buildings where they live. Indeed, Germany has one of the lowest home ownership rates in the industrial world. Why would Germans buy? Home values barely change, so owning your home is a lifestyle choice rather than a financial decision. As economics blogger Steve Waldman writes, “Homes in Germany are what a naïve economist might predict they should be, a very durable consumption good that provides a stream of housing services, not a ticket to financial gain.”
Austria and Switzerland also do housing well
Germany’s smaller German-speaking neighbors teach similar lessons. Austria uses different techniques—more public funds, fewer financial incentives—but also achieves housing abundance, then matches it with modest nationwide rent control and dense, walkable neighborhoods, as I have written.
Switzerland is a more singular case. It is even more decentralized in its governance than Germany. Yet it achieves an impressive degree of housing abundance, building about twice as much housing a year, adjusted for population, as the United States. Swiss housing prices have varied within 40 percent of their 1995 values for the last half-century, as illustrated in the figure above. They are not as stable as housing prices in Japan or Germany, but they are more stable than anywhere else. Like Germany, Switzerland disproves the notion that local control guarantees rule by obstructionists.
In outlines, Switzerland and Germany are alike: Swiss homeownership, at 40 percent, is even lower than Germany’s. In big cities in both countries it falls to 10 percent. In Switzerland, tax law surpasses Germany’s even-handedness between owning and renting, with its unusual policy of taxing imputed rent. And Switzerland has the same kind of national rent stabilization policies as Germany and Austria: modest guardrails on rent increases and strong tenure protections for renters. Rents on existing apartments are as stable as they are in Germany.
But Switzerland does not have German-style fiscal equalization. As professors Christian Hilber of the London School of Economics and Olivier Schöni of Laval University point out, Switzerland instead has decentralized not just decision-making but also revenue collection. Because localities keep whatever tax revenue they raise, they have a strong incentive to welcome homebuilding and people.
Acting on the lessons
To match the housing feats of German-speaking countries, Cascadia can align incentives for its decentralized local zoning authorities, rewarding jurisdictions financially for welcoming people. Cascadia can also adopt by-right building, iron out the distortions of “zoned capacity,” and otherwise make it as easy to erect middle housing in the Northwest as it is in Germany. Cascadians can lobby their national governments in Ottawa and Washington, DC, to stop subsidizing real-estate speculation in the form of home ownership and, like Germany, regulate their banks and write their tax codes to make housing policy about housing, not asset appreciation. And they can write strong tenant protections into state and provincial law while avoiding rent regulations that squash homebuilding.
Already, some Cascadian leaders are trying, with Sightline’s help, to incentivize cities. In Olympia this spring, legislators introduced three bills to create a tax revenue payback for Washington localities that upzone for middle housing. One would give grants for each new in-law apartment or backyard cottage constructed as a result of upzoning. Another would increase the local share of property taxes collected from newly allowed middle housing built after upzoning. A third would increase the local share of real-estate excise tax collected from new infill apartments and middle housing built thanks to upzoning. None of these matched the scale of Germany’s system; they would have generated only small streams of revenue, as opposed to tethering more than a quarter of local revenue to population size. But they were a start.
Unfortunately, none of them won adoption in 2021 on their first appearance. New legislative ideas usually take a few times to work their way up the agenda. To my knowledge, no other state or province in North America has yet tried to replicate the German model of incentivizing localities.
Cascadians can keep encouraging adoption of such policies. Perhaps before the next time such bills come up for votes in Olympia and other capitols, leaders will have learned the main lesson from Cascadia’s German cousin: if they want homes for all, they need to put their incentives where their objectives are.
Next time: How France took a big step from residential lockdown toward abundant housing.