The housing problem and the rental market

In most western countries it is obvious that even the lowest wages paid to workers should make them able to provide a roof, food and other basic necessities to their family. Let’s focus in the ability of low income households to solve their housing problem. Those of you with experience in less developed countries know that workers with low earnings, in urban and in rural areas, have to settle most of the time in slums and shacks or huts.

One reason that explains this situation is the performance of the housing rental market. Let’s take as a reference to what happens in Germany. Most of the people in this country live in a rented room, apartment or house. The German state intervenes in the housing rental market by providing apartments with subsidized rents to low income people. If you look at most Latin American countries, the percentage of households renting their home falls bellow 15%, reflecting a small rental market. This market is also quite dualistic. This means that rent options often lie in two extremes, luxurious or shack-type housing. Because of the very bad conditions of slum dwellings it is obvious that the state should subsidize rents intended to allow poor households to live in a decent dwelling. But as the rent market for middle income families barely exists, the state should also intervene to create or promote this market. The lack of renting options for middle income families is a market failure that justifies this type of intervention. Back again to the case of western Europe, the state could provide low rent apartments by giving subsidized credits to construction companies that would build and then administrate apartment buildings. A policy like this would incentivize the housing market in general, increasing the investment rate of the economy and boosting job creation.

Another reason could be the willingness of households to live in a rented dwelling or of landlords to rent their property. One could argue that low levels of willingness from both sides could be due to the law regulating this market and whether it is respected or not. The amount of protection to the tenant doesn’t necessarily curb the rental market. Taking again the case of Germany, arguably the law in this country protects the tenant more than in the USA and still the amount of households that live on a rented property in Germany is much higher. The main problem that should be solved then should be diminishing transaction costs and ensuring an effective enforcement of the law.

Apart from wide slums around big cities, other indicator that could reflect a problem in the rental market is the fact that extended families live together in the same dwelling, as actually happens in many Third World countries. One might think this is due to cultural reasons, but in some countries this could well be due to the lack of rental options.

Mentalities should change and one shouldn’t believe that the ideal society is one in which every household is owner of its dwelling. This type of thinking is what has lead to households building shacks whenever they can and to states not being able to hold their promises of ensuring decent dwellings for everybody. An ideal society should be one in which every household has a decent dwelling, of his property or rented. Since many people won’t be able to buy a dwelling with their low or middle income and it costs less to the state (and the society in general) to subsidize rents than to give away homes for a heavily subsidized price, the rental market should be promoted in countries with high percentage of the population living in shacks and slums.

Rents in Berlin

One of the good reasons to live in Berlin is that it’s a city of low rents, comparing it with other German or European cities. By about € 400 ($ 622, £ 315) a month it is very probable to rent small apartments in centric zones.

What can explain these low prices? If we analyze the history of the city we find that the rents of East Berlin apartments, at the time of the German Democratic Republic (GDR), were highly subsidized. For instance, in the 1980s small apartments could be rented in this side of town by about € 20 ($ 31, £ 16) a month. These low prices continued after the German reunification, until the mid 1990s. From then the prices have been increasing more rapidly than inflation.

Until which level can rents keep increasing? The restriction of this increase of prices comes by the side of the demand. Berlin is a city with one of the greater levels of unemployment of Germany. This year it’s around 16%. It is a very high level if one considers the levels of full employment (around 4%) in southern cities like Stuttgart and Munich. The effect that has high unemployment on the apartment renting market is the one of an insufficiency of the demand that depresses the equilibrium rents. Thus the acceleration of the increase of rents must be very correlated with economic growth as long as the supply stays constant.