(Bloomberg Opinion) -- Facing a third year of economic stagnation and a growing shortage of affordable homes, Germany’s next government must confront some unpalatable truths: Construction has become too expensive and complex, and excessive regulation is partly to blame. Fortunately there’s an alternative — allow builders to deviate from burdensome standards.
The industry’s problems are those of the nation in a microcosm: Over-engineering and risk-aversion are brakes on growth, while the resulting lack of housing and rising rents inflame social tensions and fuel support for the extreme right and left.
“There are many German words ending in '-protection,' but we Germans end up protecting ourselves to death,” Dirk Salewski, president of BFW, the German association of independent real estate and housing companies, told me. “The result is much higher construction costs.”
Unusually for such a wealthy country, Germany is a nation of tenants: More than half the population rents, higher than any other European Union nation; the amounts they pay are often tightly regulated and have therefore increased comparatively slowly in recent years.
However, it’s a different story for new arrivals or anyone moving house to start a family: New-build rents and short-term furnished leases aren’t capped and the costs of those have soared. New rents have increased by 4% a year since 2010 — more than twice as fast as existing contracts, according to the German Council of Economic Experts.
While there are still plenty of unoccupied properties in less economically dynamic parts of east Germany, vacancy rates are extremely low in big cities like Berlin. Yet construction activity has collapsed. Nationwide, only around 250,000 dwellings are likely to have been completed in 2024, according to an Ifo Institute estimate, far short of the defunct three-party coalition’s target of 400,000 per year and set to worsen an existing shortage estimated at around 800,000 apartments.
The situation won’t improve soon: Building permits for dwellings slumped 19% in the 11 months to November 2024, compared with the same period a year ago. Meantime, Germany’s population has increased by around 3 million in the last decade, in part due to the arrival of Ukrainian and Syrian refugees.
While increased financing costs have triggered property-developer insolvencies and left building sites unfinished, interest rates aren’t the only problem; residential construction costs have almost doubled since 2000, according to government data, and expenses related to technical standards are even more extreme, according to the ARGE building research institute, based in Kiel.
The upshot is that building math no longer adds up: the estimated €18-€20 ($19-$21) monthly rental income per square meter often needed to underwrite a residential project is around double the national average rent.
Getting the industry back to work would go a long way toward reviving the economy — construction investments account for around 12% of gross domestic product. The solution is to make building cheaper.
The government can’t dictate borrowing costs or the price of materials like concrete, but it does have some influence over building standards (notwithstanding the states, municipalities and industry bodies that are also very influential).
The status quo isn’t tenable: Some regions still force apartment developers to include underground car parking spaces, even though many of the prospective tenants don’t drive, which can inflate apartment costs by up to 10%. And because building rules aren’t harmonized among states, it’s difficult for contractors to apply standardized processes such as serial and modular construction. Builders are wary of deviating from onerous technical norms and generally recognized codes of practice, due to potential legal consequences.
I’m not suggesting Germany should abolish fire-safety rules, or abandon decarbonization and aesthetic considerations. But many of these norms are comfort-related, and the costs have become prohibitive. For example, a bathroom will tend to have both underfloor heating and a radiator to meet temperature guidelines, while reinforced concrete ceilings are super-thick to avoid falling foul of noise regulations. Meanwhile, a 75 square-meter apartment may end up with almost 50 plug sockets — surely too many even for the most tech-orientated household.
'We need to move away from gold-plated construction standards,” Salewski told me. “The priority should be 'warm and dry'.” Germany’s biggest landlord appears to agree: Announcing a resumption of construction following a long hiatus in November, Vonovia SE said it would forego underground parking, optimize energy standards and increase modular construction.
In some ways, the outgoing government didn’t make life easier for the construction industry: Since 2024, new residences are required to have heating systems powered at least 65% by renewable energy, for example. But in other respects, the government was quite forward-thinking. For example, in July housing and justice ministries proposed allowing building planners and customers to deviate from comfort standards and achieve cost reductions worth as much as 10%.
Dubbed “Building Type E” (as in “easy”), the policy was well-intended, but the coalition collapsed before it could be approved by parliament, and experts said the way the rules were drafted might invite more legal conflicts than they solved.
The next government shouldn’t give up though. Friedrich Merz, the front-runner to become next chancellor, wants to allow building firms to deviate from planning rules, and he’s a fan of prefabricated construction. “Currently in Germany we often build houses as one would an expensive bespoke suit,” Merz complained to tabloid Bild-am-Sonntag in December (one imagines Merz, a former corporate lawyer, knows a thing or two about such clothing). Furthermore, the conservative CDU/CSU candidate says first-time buyers should pay lower real estate transfer taxes — a policy this columnist, a would-be homeowner who currently rents, would support.
Property-acquisition taxes vary by state, but can be as much as 6.5%; including notary, land registry and real estate agent fees, the ancillary costs of purchasing a home can thus total about 12%, which prevent Germans acquiring property and building wealth.
However, Merz’s hawkish stance on immigration risks making the housing crisis worse, by deterring foreign laborers; almost one-quarter of German builders have foreign passports. Meanwhile, his likely coalition partner, the Social Democrats, want to extend rent controls that are due to expire later this year. Doing so might deter investment and unfairly benefit insiders over those who can only find an unregulated property.
The solution to soaring rents is obvious: build lots more homes, and the cheaper and quicker those are built, the better. While perfect is the enemy of good, the answer to not enough homes is “good-enough” homes.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.
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