In the last month KCB bank has promoted its 105% mortgage finance product. The intention has been to increase home ownership within the Kenyan middle class who feature in the advert. Moreover, Shelter Afrique has financed organisations such as Jamii Bora bank and Kenya Medical Association (KMA) Housing Co-operative with KES 100 and740 million respectively. The funds are to enable them offer mortgage products to their customers. However, will this drive to increase home ownership in Kenya, result in better economic performance? It seems the answer to that is no if the German example by Matthew Philips is taken into account.
Germany’s home ownership rate ranks among the lowest in the developed world, and nearly last in Europe. Here is comparative data from 2004, the last time the OECD updated its numbers.
In 2013, the home ownership rate was 43% . Isn’t home ownership a crucial cog to any healthy economy? Well, as Germany shows—and Gershwin wrote—it isn’t necessarily so. In Spain, around 80% of people live in owner-occupied housing. However, unemployment is nearly 27%, thanks to the burst of a giant housing bubble. In Germany, unemployment is 5.2%.
Background to Germany’s housing
By the time of Germany’s unconditional surrender in May 1945, 20% of Germany’s housing stock was rubble. Some 2.25 million homes were gone. Another 2 million were damaged. A 1946 census showed an additional 5.5 million housing units were needed in what would ultimately become West Germany. Moreover, the economy was a heap. Financing was nil and the currency was virtually worthless. (People bartered.) If Germans were going to have places to live, some sort of government program was the only way to build them.
Rollerskating in Essen, February 1949
The political situation in post-war Germany was still quite tense. Leaders worried about a re-radicalization of the populace, perhaps even a comeback for fascism. Communism loomed as an even larger threat, with so much unemployment. West Germany’s first housing minister—a former Wehrmacht man by the name of Eberhard Wildermuth—once noted that “the number of communist voters in European countries stands in inverse proportion to the number of housing units per thousand inhabitants.” Because of such political worries—as well as genuine, widespread need—West Germany designed its housing policy to benefit as broad a chunk of the population as possible.
The rise of renting
Soon after West Germany was established in 1949, the government pushed through its first housing law. The law was designed to boost construction of houses which, “in terms of their fittings, size and rent are intended and suitable for the broad population.” It worked. Home-building boomed, thanks to a combination of direct subsidies and generous tax exemptions available to public, non-profit and private entities. West Germany chopped its housing shortage in half by 1956. By 1962, the shortage was about 658,000. The vast majority of new housing units were rentals. Why? Because there was little demand from potential buyers. The German mortgage market was incredibly weak and banks required borrowers to plunk down large down payments. Few Germans had enough money. Economists think German housing policy struck a much better balance between government involvement and private investment than in many other countries. For instance, in the UK, when the government gave housing subsidies to encourage the building of homes after the war, only public-sector entities, local governments, and non-profit developers were eligible for them. That effectively squeezed the private sector out of the rental market. In Germany, “the role of public policy was to follow a third way that involved striking a sensitive balance between ‘letting the market rip’ in an uncontrolled manner and strangling it off by heavy-handed intervention,” wrote economist Jim Kemeny, of the German approach to housing policy. Britain also imposed stringent rent and construction cost caps on developers of public housing. Under those constraints, housing quality suffered. Over time, the difference between publicly and privately financed construction became so glaring that rental housing—which was largely publicly financed—acquired a stigma. Germany also loosened regulation of rental caps sooner than many other countries, according to economist Michael Voightländer, who has written extensively about Germany’s housing market. By contrast in the UK, harsher regulation on rented housing stretched well into the 1980s, pushing landlords to cut back on maintenance and driving the quality of housing down still further.
More reasons for renting
Why is renting cheap in Germany? Well, even though the country’s policies might have been slightly more balanced than in other countries, its rental market is still robustly regulated, and the regulations are quite favorable to renters. (Given the strong political constituency renters represent in Germany, this would be expected). For example, German law allows state governments to cap rent increases at no more than 15% over a three-year period. In addition, unlike high-homeownership countries like Spain, Ireland and the US, Germany doesn’t let homeowners deduct mortgage-interest payments from their taxes. (There’s more on the structure of European tax systems here.) Without that deduction, the benefits of owning and renting are more evenly balanced. “Both homeowners and landlords in Germany are barely subsidized,” wrote Voightländer in a paper on low homeownership rates in Germany. A number of other elements contribute too, but it’s tough to disentangle what is cause and what is effect. For example, German banks are quite risk-averse, making mortgages harder and more expensive to get. Others argue that the supply of rental housing might be higher in Germany because of its decentralized, regional approach to planning. (The UK is much more centralized.) The German people clearly like how their system of housing works. According to the OECD, more than 93% of German respondents tell pollsters they’re satisfied with their current housing situation. That’s one of the highest rates of any nation the rich-country think tank surveyed. Then again, the Irish and the Spanish—where homeownership is much more widely spread—seem just as happy.
Some parallels can be drawn between Kenya and Germany. Like Germany in 1945, Kenya has a need for housing. In Kenya’s the need is caused by the country’s population growth that is currently estimated by statistics from the world bank to be at 2.7% per annum. According to a report in March 2014 by Hass Property Index in association with The Mortgage Company (TMC), high interest rates make loan payments twice as expensive as renting the same homes. And in light of that, maybe its time for Kenya to consider going the rental way like Germany.
