What can Australia learn from Germany’s Progressive Property Market?

July 16th, 2014

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“It’s not a house, it’s a home,” Daryl Kerrigan once said in the quintessentially Australian film The Castle. But it seems that this very obsession with homeownership is holding the country back, argued Eryk Bagshaw in The Sydney Morning Herald.

Recent research by the The International Monetary Fund (IMF) found that housing bubbles in English-speaking countries are doing plenty of damage. “IMF research shows that of the nearly 50 systemic banking crises in recent decades, more than two thirds were preceded by boom-bust patterns in house prices,” said Dr Min Zhu, deputy managing director of the IMF.

However, Germany has not experienced a housing boom since the end of the Second World War, said economist Jim Kemeny. What exactly has kept them afloat? The following reasons were put forward by Bagshaw:

  • Lack of interest in homeownership – Germans can afford homes, but they’re not interested in buying or investing in property because they’re opposed to debt. 93% of Germans are okay with the fact that only 41% of the population own a home. Germans prefer to increase their capital by investing in businesses, and when they’ve reached the desired amount, only then will they purchase a house that can be passed on to their families for many generations.
  • Progressive rental housing programs – There’s a huge supply of rental properties in Germany with cheap rents.
  • Conservative bank policies – Banks can ask people to pay up to 33% of their mortgage upfront with a fixed interest rate for 10-30 years. Rental leases can even last 40 years or more.
  • Conservative government laws – Germany has a highly-regulated rental property market that has laws which protect, encourage, and even favour long-term renters (which most Germans are) over landlords. You can’t evict a tenant who pays and it’s difficult to evict one who doesn’t; evictions can even make the headlines.

Furthermore, the house price-to-income ratio in Germany has continued to fall over the past 10 years. It has increased a little in the last few years, but it stayed 17% below its long-run average in 2013. Australia’s house price-to-income ratio, on the other hand, is the third highest among other countries, which is 4.3 times the average yearly income, according to the Australian Bureau of Statistics.

Overall, long rental leases, plenty of rental properties with low rents, and a property market that doesn’t offer high returns from investing in houses are the key reasons why Germans aren’t interested in buying bigger, better properties and also why they haven’t experienced a housing boom. Australia can learn a lot from Germany, like developing more rental properties with affordable long-term rent, thus preventing housing bubbles that can lead to a market crash.