Child Tax Credit for Home Buyers, while Popular, Fizzles in the Big Cities
The German Government set itself the goal to promote homeownership, a decision it had been urged to make for a long time, given the fact that Germany’s homeownership rate is a low 45 percent. So far, the main measure toward this end has been the child tax credit for first-time home buyers passed by the governing Grand Coalition. Since September 2018, families have had the chance to apply for subsidies that amount to 1,200 euros per year for every child aged ten or over. The latest figures show that the child tax credit for first-time home buyers is used mainly in rural areas, but barely so in conurbations.1
By the end of November of 2018, the number of applications in Hamburg and Berlin was well below average. Only 619 applications were filed in the capital—which is less by a third than in the state of Saarland whose population is two thirds lower than Berlin’s. An above-average number of families and single-raising parents applied for the child tax credit in the populous non-city states of North Rhine-Westphalia, Baden-Württemberg and Lower Saxony.
Critics Concerned about Deadweight Effects
In the metropolises, where the homeownership rate is particularly low, the child tax credit has hardly helped to increase the number of people buying homes. Sceptics, such as Daniel Föst, the construction and housing policy spokesman of the Liberals in the Bundestag, criticised the child tax credit because it creates deadweight effects: It is used mainly by people who would be able to afford a home with or without the subsidy program. A substantial increase in the homeownership, which surveys suggest could be accomplished by reforming the real estate transfer tax, for instance,2 is therefore not to be expected from the child tax credit.
That being said, the subsidy turns out to be more popular than the Federal Government predicted. The KfW development bank, which is in charge of the program, registered nearly 48,000 applications by the end of 2018.3 This could mean that the budget set aside for the program, which was to be limited to three billion euros annually, will be exhausted before the end of the application period.
Child Tax Credit Could Actually Cause a Hike in Construction Costs
As the child tax credit for first-time home buyers seems to have been rather ineffective in raising the homeownership rate, it cannot be expected to have a positive impact on housing construction either. In fact, the opposite may be the case. It is not any lack of funds that is holding things up, as the Liberals’ Daniel Föst explaineds, but the shortage in building land, the limited capacities of the construction industry and the notorious red tape.4
This assessment is backed by a forecast of the DIW German Institute for Economic Research, which predicts another increase in construction costs. It quotes projected price hikes by 4.5 percent in the ongoing year and by 3.5 percent next year. The DIW identified strong demand and a slow expansion of capacities in the building trade as causes. Time-bound subsidies such as the child tax credit and special depreciation allowance are not a suitable foundation for a sustained capacity expansion, or so the institute argued. It added that the shortage in tradesmen and the concomitant price growth are here to stay. From the DIW’s point of view, it would be far more effective for the housing market to create “pinpoint incentives for brownfield development and infill densification.”5