Affordable housing in Germany compared to S’pore

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Affordable housing in Germany compared to S’pore

September 30th, 2014 | Author: Contributions

HDB flats

The economy in question is Germany according to this Forbes article published in Feb 2014 (http://www.forbes.com/sites/eamonnfi...upposed-to-do/). The TRE Editor asked the writer if he could pen an opinion of affordable German housing as mentioned in the article.

German Housing

Forbes was effusive in its praise of German housing and the economy. Here were some key points:
- German current account surplus was the world’s largest in 2012, 15 times bigger than China on per-capita basis and was achieved with some of the world’s highest wages.
- German municipals increase housing supply on a consistent basis, helped by financial support from the federal government. House-builders do not hoard land, since prices do not escalate and when needed additional land comes available at reasonable costs.
- Housing is deliberately structured to encourage renting (ownership is only 44%, only Switzerland is lower). Tenants enjoy strong rights and are virtually immune from eviction and unfair rent increases.
- Home ownership is subject to various taxes while landlords enjoyed favourable tax treatment
- German banks cannot lend more than 80% of the value of property, the balance made up by cash. Unlike UK, US and SG, interest payments are not tax deductible.
The writer adds the following data:
GermanySingaporeNominal Prices since 1990+30%+164%Real prices (adjusted for inflation) since 1990-17%+111%House price to income ratio6 x22 x% Household income spent on housing21%31%Mortgage ratio of income41136Affordability index2.430.73
Note that German wages generally rise in line with inflation due to collective bargaining. Given the decline in house prices in real terms, home ownership becomes more affordable despite the increase in nominal prices.

The Social Market Economy

German housing needs to be understood in context of the social market economy or Rhine Capitalism, euphemistically described as “capitalism with socialist characteristics”.

Between the destruction wrought by 2 world wars, were hyperinflation in 1921-24 and 1945, a flirtation with socialist revolution and a catastrophic embrace of fascist totalitarianism, all within only 30 years persuaded post war governments that stability is paramount and to implement a viable socio-economic-political alternative between the extremes of liberal capitalism and planned socialist economics. The result is the social market economy, the practical expression of social democratic ideals of the British Fabian Society and progressive European socialists who advocated peaceful, gradualist social reform of capitalism, rejecting the revolutionary socialism of the Marxists.

The social part of the term is well known to readers thanks to Messrs Leong and Ng articles of the Nordic welfare system. The writer instead focuses on relevant parts of German penchant for economic stability.

- Price stability is sacred. The German economy generally grow within its long run potential of 3% pa, giving up strong growth (which is inflationary) in favour of price stability. To balance growth and inflation, checks and balances are indispensable such as a central bank that is independent from government.
- Germany like most 1st World countries, cannot avoid huge disparities in income wrought by technological changes which historically had caused social instability. To mitigate this, redistributive policies and co-determination between workers and management are introduced to achieve more equitable outcomes evidenced by low Net Income Gini co-efficient of 28.3 versus SG’s 41.6.
- Encouraging rent and keeping prices low gives up the boost to economic growth from rising home prices but avoid the destructive effects of the boom and bust cycles of the property market on the overall economy.

The Achilles Heel
Remember all economic policies involve trade-offs, even for the best run economy. Due to low home ownership and decline in real prices, there is less wealth and savings effect. Because of this and excessive savings due to that lack of wealth effect, Germany suffers from chronically weak consumption and is heavily dependent on export markets. Despite being a large, rich and advanced economy, Germany is unable to generate sufficient internal demand. It is therefore dependent on demand from those much derided Anglo-Saxon economies (UK and US) and other countries.

Whither SG?
In the writer’s opinion, from 1990s SG had shifted policy bias inexorably away from Rhine Capitalism (remember the Dutchman Albert Winsemius). HDB flats are no longer simply social housing but a vehicle for government promoted, markets based asset enhancement. But in reality, SG housing is in a proverbial No Man’s Land. In the Anglo-Saxon model home ownership is financed through current savings while leasehold properties hold their value because leases are renewed at nominal costs. Whereas in SG, wealth effects from home ownership are illusory or at best insignificant, simply because financing home ownership is at the expense of future retirement funding and leasehold values decline sharply. In essence, SG has neither the benefits of the Anglo-Saxon model of wealth effects nor the social market model of affordable housing.

The risky proposition of housing having a disproportionate impact on the economy and retirement is diametrically opposed to the principle of stability at the heart of the social market economy. An ironic outcome since a certain Prime Minister promised Swiss standards while moving away from the very model of which Germany like Switzerland is an adherent.

Chris K

* Chris K holds a senior position in a global financial centre bigger than Singapore. He writes mostly on economic and financial matters to highlight misconceptions of economic policy in Singapore.


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