Rent Growth – Downward Spiral for Low-Income Groups
People in lower income brackets suffer greater hardship from the strained housing market than high earners. This is the gist of a survey that Humboldt University in Berlin conducted in collaboration with the University College London.1 The scientists had compared the housing costs of 100,000 people between 1993 and 2013 and were surprised by what they found. For the 20 percent at the lower end of the income scale, housing costs rose from 27 percent of their disposable incomes to 39 percent during the 20-year period studied. They identified a reverse trend among the highest-earning groups—for whom the housing cost share actually declined, from 16 down to 14 percent.2
Widespread Rent Growth, Slowing Momentum in the Metropolises
The cause underlying this development is not least the real wage performance. The disposable income of the bottom fifth of the labour force was effectively eight percent lower in 2013 than it had been in 1993, whereas the salaries of top earners grew at an average of seven percent during the same period. Add to this that people with higher incomes often owner-occupy their homes, causing them to benefits from declining levels of interest rather than being burdened by rising rent rates. The trend is intensified by the trend in real estate prices, as the Housing Price Index for 2018/2019 documents that was published by the IVD Federal Investment and Asset Management Association this week.3 It shows that rents in Germany rose by an average of 4.3 percent year on year. While a flat raised after 1949 was still let at an average square-metre rent of 7.72 euros in 2017, the average rent this year is 8.05 euros.
It should be added that the rent growth coincided with a slowing momentum in the existing housing segment of the “Big Seven” cities except in Munich where the growth picked up steam again, rising from 4.0 to 5.8 percent. In Berlin, which remains the most affordable German metropolis with an average square-metre rent of 10.50 euros, the growth rate was down to 5 percent (compared to 5.3 percent in 2017). Analogously, the rent growth slowed for flats with medium amenities in major cities of up to 500,000 residents. Small and mid-size cities presented a different picture. After years of stagnating or even softening rent levels, rates began to rise much faster last year than in cities of other categories.
Promotion of Homeownership to be Stepped up
The rent growth therefore continues to exceed the general inflation rate by far while the average share of the rental costs in the disposable household income is climbing steadily. The fact that rents in the new-build segment grew at a faster rate in 2018 than the previous year demonstrates an increasingly urgent need for an active housing policy. Especially in the lower and medium income brackets, rental costs threaten to become a relevant social issue because the completions rate is too low to relieve the strain on the market. As the survey by the Berlin-based researcher suggests, an effective promotion of homeownership is called for. It is the only way to keep the societal gap between housing cost ratios from widening any further.