A Failed Nation of Homeowners: Why Germany Eliminated Large-Scale Subsidies for Homeowners

For most Germans, renting their homes is nothing unusual. The country has developed an affordable, well-functioning rental market and a longstanding reputation as a nation of renters, as the rate of homeownership has remained stubbornly low (43 percent in 2013) when compared with the U.S. (65 percent in 2013).[1] The story often told is that generous housing subsidies for the rental market and the absence of homeownership subsidies helped produce such an outcome.[2] Yet, this is only partly true. Contrary to this popular belief, homeowners in the country did receive sizable tax breaks and subsidies as part of social housing programs from the 1950s until the mid-2000s. For decades, policymakers across the political spectrum have tried to create a nation of homeowners—but failed to do so.

After the destruction of World War II, the country faced severe housing shortages. To stimulate housing, the German state adopted far-reaching subsidies for both the rental sector and homeowners through the tax code and social housing programs. The subsidies for homeowners even outlived the nation’s housing recovery well into the 2000s. Yet, the failure to create a nation of homeowners also made these subsidies politically vulnerable. In the mid-2000s, they were suddenly on the chopping block, when the grand coalition of Christian (CDU) and Social Democrats (SPD) under Chancellor Angela Merkel eliminated most federal subsidies for homeowners.

The key to understanding why the country eliminated its large-scale subsidies for homeowners lies in the power of Germany’s federal states (Länder). In pursuit of their interests, the Länder both influenced housing legislation at the federal level and implemented federal laws in ways preferable to them at the state level.[3] Specifically, the Länder not only undermined the objectives of federal homeownership policies by distributing more social housing funds to the rental sector than to homeowners, but also successfully supported the elimination of tax breaks for homeowners. This was, in part, because the Länder wanted to be in control of steering housing policy and distributing funds with sensitivity to the housing needs of their regions and local communities. The influence of federal states in Germany is all the more startling when compared with the U.S., a country also known for its decentralized government, where federal housing policies put federal agencies in charge of the most important homeownership policies.

Policymakers and housing experts may be interested in these findings for a number of reasons. The German toolkit of homeownership policies differed from that of the U.S., providing some lessons that may help us better understand and advance homeownership policies in the U.S. Moreover, where the U.S. finds itself stuck in a “socialized” homeownership market,[4] i.e., the so-called “third rail” of U.S. politics unlikely to be touched by political leaders, German policymakers managed to scale down subsidies for homeowners. This is all the more important, as housing experts voice increasing concern about the state of the post-crisis housing finance system in the U.S.[5]

Subsidizing Homeowners through the German Tax Code, 1949-2006

When roughly half of the German housing stock was destroyed or severely damaged as a result of WWII—producing a shortage of 4.5 million homes—the German government under Chancellor Konrad Adenauer (CDU) decided to stimulate both rental and owner-occupied housing. Tax breaks for homeowners were part of this larger effort to stimulate housing and date back to the early years of the Federal Republic in 1949. Over time, these tax subsidies have not only outlived their original purpose of rebuilding the country, but they even became the largest subsidies in the German tax code, amounting to roughly €11.4 billion in 2004.

The nature of tax breaks for homeowners in Germany differed decidedly from those in the U.S. Homeowners in the U.S. have mainly benefited from the mortgage interest deduction, the property tax deduction, the capital gains exclusion, and the foregone tax on imputed rent (a tax on the rental income one generates by living in one’s own home). In contrast, U.S.-style tax subsidies for homeowners were never the most important ones in Germany—most notably not the mortgage-interest deduction.[6] Instead, homeowners were able to deduct from their income a certain percentage of the construction and financing costs of their homes through the so-called Eigenheimzulage.[7] The tax break was limited to certain income groups, co-financed by the Länder and the federal government, offered as a tax deduction (before 1996) and a direct tax subsidy (after 1996),[8] could only be used once per taxpayer for a limited amount of time, and, for the most part, privileged those building new homes over those purchasing older homes—a number of key differences when compared with U.S. policies. Technicalities aside, the larger point is that both countries subsidized homeowners through tax breaks deviating from the economic principle of tax neutrality, just in different ways.

Another distinctive feature of German homeownership tax breaks was their connection to other policy areas, such as family and environmental policy. In 1981, for instance, homeowners with children could deduct a higher amount from their income as part of the tax subsidy. This added a family policy component to the subsidy. Similarly, in 1996, homeowners building environmentally-friendly homes could deduct higher amounts from their income, which appended an environmental element to the subsidy. Tax breaks for homeowners were therefore multifunctional, with the goal of serving multiple policy objectives.

The political story behind these subsidies is intriguing. While the tax subsidies were relatively uncontested until the 1980s in Germany—largely sustained by strong center-right parties—the political climate changed dramatically in the 1990s. The reunification of the country was especially important in upsetting this path dependence. First, it reinforced an existing trend of growing deficits, and with it, fiscal consolidation efforts in the late 1990s and 2000s. Second, reunification led to some housing market imbalances, with large-scale housing vacancies in eastern Germany and housing shortages in the western parts. And third, given income and wealth differences between the old and new federal states, it elevated the issue of inequality to the political agenda, including the regressive nature of tax breaks for homeowners.[9] This led several Länder, including conservative-led states, to join the efforts of Social Democrats (SPD) launching a series of attacks to eliminate the tax subsidy. The Länder opposed the subsidy, among other things, because they co-financed the subsidy (by more than 50 percent) in times of growing deficits and viewed it as an imprecise instrument to manage unbalanced regional housing markets (i.e., vacancies in some regions and shortages in others). In 2006, the grand coalition of CDU and SPD eventually removed the tax break for homeowners supported by the Länder in the country’s upper house.

How Germany’s Social Housing Programs Failed to Promote Homeownership, 1950-2006

Another important way of subsidizing homeowners was through the large-scale social housing programs (i.e., Sozialer Wohnungsbau). To most observers, the focus on homeownership as part of social housing programs is counterintuitive, as social housing programs are often associated with public housing projects or supporting the rental sector. Yet, social housing funds (i.e., subsidized loans or interest-rate subsidies on loans) in Germany were offered to both homeowners and the rental sector. The regionalized character of these subsidies is distinctive when compared with the national character of subsidies in the U.S. mortgage market, where federal agencies—Fannie Mae and Freddie Mac, for instance—tend to harmonize mortgage rates across regions (and their risk levels) through federal subsidies and government guarantees.[10]

Much like the origins of tax breaks for homeowners, the origins of social housing subsidies for homeowners date back to the early years of the Federal Republic, when the Adenauer government introduced the First and Second Housing Laws in 1950 and 1956. The Second Housing Law already specified that homeowners should be given priority when it comes to the allocation of these funds. That was because the Christian Democrats, in particular, tried to create a nation of homeowners in the early postwar years, which reflected their strong preferences for family life in single-family homes, especially for uprooted families, and an anti-collectivist ownership ideology.[11]

Strikingly, despite the federal law’s goal of supporting homeowners, most funds were given to the rental sector. This is because the Länder—responsible for distributing federal and their own social housing funds—decided to do so against federal guidelines. With appropriate caveats about some differences between federal states, there were only two brief periods from 1950 until 2000 in which more social housing funds were distributed to homeowners than renters (i.e., from 1976 to 1981 and from 1984 to 1988), when the share of subsidized owner-occupied housing briefly climbed above 50 percent and peaked at 68.7 percent in 1987.[12] This, of course, stands in stark contrast with the U.S., where the mortgage giants, Fannie Mae and Freddie Mac, supported multi-family rental housing only marginally.

There are a number of reasons why the German Länder did this. Often, it did not make much sense for states and local communities to fund single-family homes, especially in metropolitan areas where land is scarce and expensive. In addition, states did not want to encourage urban sprawl and suburbanization, which would have put them on the hook for financing new infrastructure, such as schools and hospitals.[13] Administratively, it was more efficient to approve funding applications from experienced (public or private) companies specialized in building multi-family homes than from thousands of inexperienced homeowners. In sum, states often viewed distributing funds to the rental sector as more pragmatic and as a means to provide affordable housing for larger parts of the population, with sensitivity to the housing needs of their local communities.

The funding of social housing units, both for renters and homeowners, corresponded closely with developments in the larger housing market. In times of balanced housing markets—a perceived equilibrium between housing demand and supply—federal and state policymakers decreased the number of subsidized units; and in times of housing shortages, the number of supported units increased. For instance, construction was booming in the early postwar years, with 3.5 million newly built housing units from 1950 until 1956, roughly 70 percent of which received social housing subsidies. While construction levels remained high until the mid-1970s (roughly 500,000 to 700,000 units per year), given strong population and economic growth, the share of subsidized units declined steadily to about one-third, in part because the housing crisis was over, the private capital market recovered, and policymakers started celebrating a balanced housing market. Importantly, while the federal government provided the lion’s share of social housing funding in the 1950s, the Länder had at least matched federal funding with their own funds since the 1960s.

The reunification of the country, including the integration of two very different housing markets, upset this equilibrium. While reunification led to an initial increase of housing activity in the country to modernize the eastern German housing market and to stimulate western German housing to cope with newcomers from the eastern parts, it also contributed to an overheated eastern German housing market fueled by short-term tax incentives and other subsidies. The result was large-scale housing vacancies of about one million units and subsequent federally funded demolitions in eastern Germany. As a result, housing activity in the country leveled off in the 2000s. In 2003, the social housing programs subsidized a mere 32,000 units (down from 162,000 units in 1994). Still, between 1950 and 2004, the social housing programs subsidized 36 percent of 25.3 million newly built housing units in the country, a government program that most analysts consider a success.

In the 2000s, the German Länder received even more autonomy in formulating social housing policy. In light of dim demographic projections and re-balancing housing markets, the first major reform of 2001 included a notable shift from supporting affordable housing for large segments of the population—the signature theme of the older social housing programs—to those in need of affordable housing.[14] In 2006, as part of Merkel’s federalism reform, the Länder received the full authority of distributing social housing funds, effectively sidelining the federal government. This was because the Länder had already provided the lion’s share of social housing funds and long pushed for more autonomy in social housing policy.[15] In doing so, the federal government gave up on its ability to react swiftly to housing shocks, such as demographic and economic developments, including the recent influx of immigrants or refugees.

Larger Implications

Today, there are relatively few homeownership subsidies left at the federal level in Germany.[16] The few programs that still exist are, for the most part, administered by the Länder.[17] Despite the country’s low rate of homeownership, Germany has developed a relatively balanced and well-functioning housing market, which offers homeownership for some and—with a few exceptions in major cities—high-quality and affordable rental housing to others.

 Observers may be startled by how the German state reduced its footprint in the country’s home finance market, while the U.S. is struggling to do the same. Comparing the political economies of both countries sheds some light on this issue. Housing is an essential part of the U.S. growth model, based on consumption and finance, with important transmission effects into the larger economy. The German model is largely based on exports and savings and much less dependent upon housing. Debates in the U.S. are therefore often centered around the effects of reform on housing demand, mortgage rates, house prices, and consumption. These considerations are all the more important as many Americans use their homes as a form of private social insurance. Contrary to the U.S., these factors are rarely mentioned in German political debates, because homeownership policies have not tied in closely with the country’s growth model (and produced fewer homeowners). Instead, policymakers view housing policy as a means to achieve family, urban development, or asset-based welfare priorities and, of course, affordable housing. The economic growth models of both countries are therefore an important part of the equation when it comes to policymaking in the housing area.

Finally, homeownership is not all we should talk about when it comes to housing. The German experience shows that while the country’s homeownership project failed, it managed to develop a well-functioning, affordable, and high-quality rental market. In contrast to the U.S., the German state provided generous subsidies to both forms of tenure (i.e., renters and homeowners), often empowering regional governments to decide how to distribute funds. In times of stagnant wages, rising student debt, tight credit conditions, and the experience of the recent financial crisis, many people in the U.S. are in need of affordable housing. U.S. policymakers could respond to these concerns by providing reasonable subsidies to both rental and homeownership markets, with some more sensitivity to the housing needs of their local communities.[18] This may help provide affordable housing for larger parts of the population.

Alexander Reisenbichler is a Ph.D. candidate in political science at the George Washington University and a former DAAD/AICGS Research Fellow.


[1] Data retrieved from: U.S. Census Bureau; Federal Statistics Office Germany. Please note that the 2011 census in Germany estimated the homeownership rate to be 46 percent in 2011.

[2] Michael Voigtländer, “Why is the German homeownership rate so low?” Housing Studies 24:3 (2009): 355-372.

[3] Also see, Peter J. Katzenstein, Policy and politics in West Germany: the growth of a semi-sovereign state (Philadelphia: Temple University Press, 1987); Fritz W. Scharpf, “The joint‐decision trap: lessons from German federalism and European integration,” Public administration 66:3 (1988): 239-278; for an example in a different policy area—i.e., old-age care—see Andrea Louise Campbell and Kimberly J. Morgan, “Federalism and the politics of old-age care in Germany and the United States,” Comparative political studies 38:8 (2005): 887-914.

[4] I adopt this characterization from Mervyn King, the former head of the Bank of England. Quoted in: Bethany McLean, Shaky Ground: The Strange Saga of the U.S. Mortgage Giants, Columbia Global Reports (2015). For instance, the U.S. government currently guarantees more than $5 trillion in mortgage debt and provides sizable tax breaks for homeowners.

[5] See Prepared Remarks of Melvin L. Watt, director of the Federal Housing Finance Agency (FHFA), Bipartisan Policy Center, Washington, DC (18 February 2016).

[6] Prior to 1986, German homeowners could use the mortgage-interest deduction, but they also had to pay a tax on imputed rental income. After 1986, they could no longer use the mortgage-interest deduction, but they were also no longer taxed on imputed rental income. It should also be noted that German homeowners are exempt from paying taxes on the capital gains of home sales if they owned their home for at least three years. Also, from 1950 until 1989, some German homeowners could claim a property tax deduction for ten years as part of the large-scale social housing programs.

[7]  The tax break was renamed and tweaked multiple times (it was called “7b tax break” from 1949-1986; “10e tax break” from 1986 until 1996; and eventually Eigenheimzulage from 1996-2006), but retained its core function of subsidizing homeownership through the tax code until 2006.

[8] Prior to 1996, high-income households benefited disproportionately from the tax break, because they could reduce their taxable income (and the taxes they owe) more effectively than low-income earners. After 1996, homeowners received the same amount of subsidy independent of their income.

[9] This quickly resulted in a 1996 reform that transformed the status-oriented tax break—i.e., those with higher income received larger tax breaks—into a more equitable tax subsidy that benefitted homeowners equally, regardless of income.

[10] Erik Hurst, Benjamin J. Keys, Amit Seru, Joseph S. Vavra, “Regional Redistribution Through the US Mortgage Market,” No. w21007, National Bureau of Economic Research (2015).

[11] Jeffry M. Diefendorf, In the wake of war: the reconstruction of German cities after World War II (Oxford: Oxford University Press, 1993); Robert G. Moeller, Protecting motherhood: Women and the family in the politics of postwar West Germany (Berkeley: University of California Press, 1996).

[12] There is some notable regional variation in that states such as Baden-Württemberg—the so-called land of home builders—and Rhineland-Palatinate offered more subsidies to homeowners than other states.

[13] Also see Sebastian Kohl, “Urban History Matters: Explaining the German–American Homeownership Gap,” Housing Studies (2015): 1-20.

[14] Another reason for this reform was that many people lived in subsidized units without fulfilling the income criteria for such units any longer.

[15] Fritz W. Scharpf, “Community, diversity and autonomy: The challenges of reforming German federalism,” German Politics 17:4 (2008): 509-521.

[16] For instance, the Kreditanstalt für Wiederaufbau (KfW), a government-owned development bank, extends small subsidized loans to homeowners. Other government programs, such as pension-related contributions (Wohnriester) and savings-related contributions (Bausparen), do not directly subsidize homeownership.

[17] Some Länder continue to offer programs for homeowners, including small-scale subsidized loans, but these programs differ significantly across the federal states.

[18] Richard K. Green, “Thoughts on rental housing and rental housing assistance,” Cityscape (2011): 39-55.

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American Institute for Contemporary German Studies.

Alexander Reisenbichler

Alexander Reisenbichler was a DAAD/AICGS Fellow in July and August 2014. He is a Ph.D. candidate in political science at the George Washington University, where his research centers on the political economy of housing, financial, and labor markets in advanced economies. His dissertation investigates the political economy of homeownership in the United States and Germany from a comparative, historical perspective. For this research, he has received fellowship awards and research grants from the Horowitz Foundation for Social Policy, the Free University Berlin’s Program for Advanced German and European Studies, and the Johns Hopkins University’s American Institute for Contemporary German Studies (AICGS). Mr. Reisenbichler has also been a visiting researcher at the Max Planck Institute for the Study of Societies in Cologne and the Hertie School of Governance in Berlin. His work has appeared in Politics & Society, the Review of International Political Economy, Foreign Affairs, and in several policy outlets.

He is a 2016-2017 participant in AICGS’ project “A German-American Dialogue of the Next Generation: Global Responsibility, Joint Engagement,” sponsored by the Transatlantik-Programm der Bundesrepublik Deutschland aus Mitteln des European Recovery Program (ERP) des Bundesministeriums für Wirtschaft und Energie (BMWi).