What can we learn from Germany’s housing market?

Before jumping into the intricacies of Germany’s housing market for my weekly post, I want to express my sincere condolences to the friends, family and colleagues of veteran city councillor and deputy mayor Pam McConnell, who succumbed to lung disease last week at the age of 71. I never met her, but like most, have a great deal of respect for her tireless work for the betterment of the city and the families who live here.

"Pam was a wonderful advocate for Toronto's most vulnerable residents,” said Mayor John Tory. “She spent much of her career advocating for social justice, education and literacy and poverty reduction. I respected the empathy, passion and common sense she brought to her role. She will be missed immensely but her work has ensured that this city is a stronger and fairer place."

McConnell served as a school trustee for a dozen years before being elected to council to represent Toronto Centre-Rosedale in 1994. She had lived in the Cabbagetown/Regent Park neighbourhoods for five decades. McConnell was an even-tempered, well-considered voice in council, and she will be missed.  

Should we be more like Germany?

Are we looking at real estate all wrong? An interesting article on Forbes this week talks about how very differently the German economy, one of the world’s best-run, works. Unlike pinning all our hopes for comfortable retirements and legacies for our children on the ever-increasing value of our homes, in their economy, home prices are expected to keep going down.

In an opening anecdote, writer Eamonn Fingleton recounts how one buyer found himself at odds with city officials about how much he was about to pay for a fixer-upper in the town of Goerlitz. Although he had agreed with the seller, officials found the agreed-upon price too high, and forced the seller to reduce it by nearly a third.

It certainly takes market-meddling to another level, but it is a fundamental principle of German economics that house prices remain affordable. The micromanaging is working — in 2012, a one-bedroom apartment in Berlin was selling for as little as $55,000, while a four-bedroom detached in the Rhineland could go for $80,000, about a tenth of what a similar property might go for in a major North American centre like New York.

Based on figures cited by British housing consultant Colin Wiles, 2012 prices represented a decrease of 10% in real terms compared to 30 years prior. By contrast, house prices in the UK rose by more than 230% in the same period.

We tend to think that no good can come of bureaucratic intervention in the free market, and are reticent to enact even tax legislation on foreign investors that may cool the market, but it’s hard to argue with results. German workers are paid some of the world’s highest wages, its unemployment rate is among the lowest and the country’s GDP growth has been one of the highest among the world’s major economies for a decade.

Micromanaging house sales is not so ubiquitous that it’s making the biggest difference in the market —municipal authorities are quick to add to the housing supply by releasing developable land on a regular basis, and the federal government provides ample support to the municipalities based on a current and accurate count of the number of residents in the area.

Their system also encourages renting, with strong support for tenant rights and rent controls. Homeownership is subject to substantial tax burdens and landlords get favourable treatment at tax time.

Is it time to look at the whole economy from a different perspective? Do we need to stop seeing homeownership as our primary investment? I don’t see that happening anytime soon, but it’s a curious thought!