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01.11.2021

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Great Expropriations or The Great Mistake?

On the problems of socialization and its alternatives

On September 26, a majority of Berliners voted in favor of expropriating large housing corporations. Now politicians are under pressure to act. Many people claim that the socialization of 243,000 apartments will make life better for tenants. However, it’s nowhere near that simple.

Transferring private property to the public sector poses significant legal problems and would leave the state of Berlin facing enormous costs. And the question still remains: Would the whole process even make housing more affordable? A clever alternative for tenants is to look into ownership themselves. It’s a complex web, and it’s one that we are happy to untangle in this edition of our newsletter.

The referendum: A clear result with an unclear goal

The election on Sunday, September 26, 2021 made history in Berlin – qualitatively and quantitatively: Every registered voter was able to cast 6 votes at the same time, including one in the provocatively named “Expropriate Deutsche Wohnen & Co.” referendum. Voters were asked to decide whether large real estate companies, namely those that own more than 3,000 apartments in Berlin, should surrender their properties to the state against payment for their assets. Once the votes were in, 56.4% of Berliners had expressed their support for the socialization of rental housing.

The referendum’s organizers claimed that transferring roughly 243,000 properties to public ownership would be the best way to prevent future rent increases. Whether this is feasible, and whether public ownership will even lead to lower rents, is another matter entirely.

Expropriation: possible, but by no means straightforward

According to Article 14.3 of Germany’s Basic Law, expropriation is indeed possible, but only if it serves the public good – and as a last resort. Moreover, the owners of land, houses or apartments must be adequately compensated. Incidentally, such a process can only take place on the basis of a law – passed by parliament – that determines the nature and extent of compensation.

This means that the referendum of September 26 is not legally binding. But it does put considerable pressure on politicians: According to the wording of the referendum on the ballot paper, Berlin’s Senate is “called upon to initiate all measures necessary to transfer real estate into public ownership.”

The only political party that has expressed its clear support for expropriation is the left-wing party, Die Linke (The Left). The CDU, FDP and SPD are all against expropriation. However, it would be strategically unwise for a governing party to ignore the will of the people. No wonder, then, that the new governing mayor, Franziska Giffey (SPD), has already announced a draft law. First, however, the Senate needs to determine whether the law could actually be implemented.

The legal problems: as serious as with the rent cap

From a legal perspective, there are three key problems. First, according to several constitutional law experts, any such law could easily be deemed unconstitutional, as the legislative competence for expropriation would not lie with the state, but with the federal government.

Second, the proposed law does not comply with the principle of proportionality, as only housing corporations that own more than 3,000 apartments would be impacted. This would the argument goes, be classed as unequal treatment.

And third, the referendum’s organizers proposed buying the properties at less than market value. This, in turn, could conflict with the equitable compensation required by the Basic Law. And that is enforceable.

The immediate consequence: a wave of lawsuits and significant legal costs

In the event that the bill is nevertheless pushed through and approved by Berlin’s House of Representatives, lawyers predict a tidal wave of lawsuits. Each property would be treated as a separate expropriation, which means there could be a separate lawsuit for each property: in the worst case, that would mean 243,000 lawsuits.

In purely financial terms, experts assume that claims for damages against the city could amount to as much as EUR 40 billion. Berlin is already highly indebted, which means the Berlin Senate would have to raise this money via new loans. And the money spent fighting these lawsuits would be lacking elsewhere, namely in the construction of urgently needed new housing.

The Green party has therefore already called for the city’s politicians to work with the housing companies to find a compromise that guarantees the provision of more affordable housing. Alternatively, the Greens have proposed what they are calling a “rent protection umbrella” – a voluntary pact between politicians, landlords and other housing market stakeholders.

The activists behind “Expropriate Deutsche Wohnen & Co.,” on the other hand, have already announced a second referendum if Berlin’s political leaders fail to initiate the required measures on the issue of socialization.

The alternative: ownership, not expropriation

The debate about excessive rents, especially with the problematic response of expropriation, is a clear example of the need for joined-up thinking. For example, little has been made of the fact that massive price increases are primarily caused by housing shortages. The basic market principles of supply and demand have been entirely neglected. Another problem is Germany’s low homeownership rate: At around 42%, Germany ranks lowest in the European Union.

Homeowners are not generally driven by market pressure. In most cases, they simply want to benefit from living in their own four walls. It’s a dream shared by many, which is why the desire to become a homeowner is greater today than ever before. In response, pressure is mounting to provide better support to help more Germans become homeowners.

A quick look beyond national borders shows the creative solutions other countries have come up with:

Learning from examples: approaches adopted by Germany’s neighbors

Let’s look at the United Kingdom, where land transfer tax (stamp duty) has been reformed. In order to relieve the burden on households buying small and less expensive homes, the UK government has introduced a graduated model with a generous tax-free allowance – similar to Germany’s progressive income tax system.

The Netherlands provides another model, where credit default insurance for mortgage loans has created more planning security. In the event of a borrower losing their job or getting a divorce, for example, mortgage payments are covered by the insurance. As a result, banks don’t need buyers to put up quite so much equity. The system creates a win-win situation for everyone.

France has taken yet another approach, supporting its citizens in acquiring property via interest-free loans. These loans are granted to households earning blow a specific income threshold.

We can even find a comparable (and recent) instrument in Germany: Baukindergeld, which expired in March 2021 and provided families with children with a subsidy of EUR 1,200 per child per year. Looking further back into the past, there was also the Eigenheimzulage (a subsidy for owner-occupiers) which provided a subsidy of up to EUR 2,556 plus EUR 767 per child per year until 2005. Both subsidies were available to everyone in Germany up to a certain income threshold.

What now? Ask the experts!

If you want to explore your options within the framework of the current situation – whether you are a tenant or a property owner – or are interested in finding out how future developments will affect the purchase or sale of your property, our real estate experts are ready and waiting to give you the information you need. For a personal consultation, you can reach us at any time a +49 (0) 30 887 742 50 or service@david-borck.de

Preview: Upcoming topics in this newsletter

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In our upcoming newsletters, you can look forward to these and other topics:

 

  • The buy-to-let market – What you need to consider when buying and selling rented apartments