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Why are home ownership rates in Germany so low?

By Finserv MARKETS - Jul 27,2019
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Home Ownership Rates in Germany

At last count, only 51.4% of Germans owned a home. Compare this with the highest home ownership rate in a European country: Romania, where 96.8% citizens own a home. This is followed by Slovakia (90.1%), Lithuania (89.7%), Hungary (85.3%), and Poland (84.2%). According to the latest Eurostat data, the average home ownership rate in Europe is 70% — well above Germany’s numbers.

What are the reasons behind Germany’s preference for rental housing, and the stark difference in home ownership rates in one of the most developed countries in the world vis-a-vis the predominantly Eastern European nations? Let’s take a closer look.

Legacy of World War II

Germany’s rental-heavy housing market traces its roots back to the second World War, which ended in 1945 with Germany’s unconditional surrender. At this time, 20% of the housing stock in Germany was reduced to rubble — 2.25 million houses were destroyed, and 2 million were damaged. The economy was in tatters, the currency was worthless, millions were unemployed. Germany had to be rebuilt from the ground up, and one of the highest priorities of the new government was to provide housing to the German people in large numbers. A new housing law in 1949 provided generous subsidies and tax exemptions to public, private and non-profit organisations for the construction of houses. And because of a weak mortgage ecosystem and low prosperity amongst Germans at the time, most of the new housing stock were rentals.

Why did the rental housing trend persist in Germany?

Germany wasn’t the only country that suffered a housing crisis post World War II — then why have some countries transitioned to higher home ownerships rates while Germany continues to prefer rental housing? This is because unlike many of the Eastern European nations, like Romania and Hungary, Germany’s rental market has become highly developed and very well-regulated. For one, experts believe that Germany struck the perfect balance between public-sector involvement and private investment, resulting in ample supply of high quality rental housing.

However, it’s not just about historical influences. Germany’s preference for rental housing continues because of two significant factors: a favourable, well-regulated rental market, and high costs attached to owning a home.

A well-regulated rental market allows individuals to rent housing property in an ecosystem that’s extremely tenant-friendly.. For instance, German law provides for strict rent control, and the increase is capped at 20% nominally over three years. Rental contracts are available for long-term tenures and unlimited contracts are standard. Because mortgage payments equal or exceed rent payments, renting a house makes a lot more sense for Germans if they can occupy the property for long tenures. Tenants have access to government websites through which they can ensure that the rent they’re paying is fair, and therefore the rental market remains extremely transparent. Three-month deposits are standard, and are paid back to tenants with interest when they move out. Properties are redecorated and repainted by the owner every time it changes tenants. And because the prices of housing stock rise very slowly in Germany, renting remains affordable for the majority of Germans.

As for the deterrents to home ownership, the regulatory system simply isn’t friendly. For one, the tax regime is unfavourable, because unlike many other countries, interest payments on mortgages are not tax deductible. Taxes on property are also quite high. Financing to purchase housing property is not easily available, because banks are typically risk-averse, and their eligibility requirements for accessing a mortgage make it too expensive and out-of-reach for many Germans.

Closer home in India, the situation of home ownership is quite the opposite. Traditionally, housing real estate has been considered one of the safest and most coveted forms of investment for millions of Indian families. A whopping 95% houses in rural India are owner-occupied. In urban India, only 28% of houses are rented. And with a more friendly regulatory ecosystem and government incentives, the residential real estate market is recovering from a slump and becoming, once again, a lucrative investment option.

If you’re on the market for a residential property, home loans are a great way to finance your purchase. The Bajaj Finserv Home Loan, offered on Finserv MARKETS, can give you access to financing up to Rs 3.5 crore for purchase of your new home, or even for renovating your current home. Home loan interest rates on Finserv MARKETS are extremely affordable. You can also avail a top-up loan for up to Rs 50 lakh. With PMAY options, flexible tenors, minimal documentation and no prepayment or foreclosure charges on your home loan, owning your dream home is easier than ever.

Because equitable mortgage payments equal or exceed rent payments, renting a house makes a lot more sense for Germans if they can occupy the property for long tenures.

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