The Politics of Government Support in Housing Finance: Explaining Institutional Change in Housing Finance Policy in Germany

This paper explores the evolution of housing finance policies in Germany. In times of pension cuts, German policymakers have not liberalized the mortgage market or increased subsidies for homeowners -- to the contrary, they even eliminated popular and large-scale tax breaks and subsidies for homeowners in recent decades, while retaining a conservative and illiquid mortgage market. As a result, house prices remained relatively flat (even falling in real terms) and mortgage debt decreased during past decades. Recent price increases, due to the country’s current status as a “safe haven,” have still not offset prior declines in house prices. This is puzzling when compared to other countries such as the Netherlands or the U.S. The paper argues that this is because of the specific housing finance policies -- i.e., few tax incentives and inflexible mortgage-market rules -- that policymakers in the country adopted and tweaked over time, which mainly incentivized investment into the rental sector away from owner-occupied housing. The paper traces the historical origins and changes in German housing finance policies, with a particular focus on electoral and interest group politics in key moments of institutional change, such as the elimination of the popular mortgage-interest deduction in 1987 and the homeownership subsidy in 2006 (Eigenheimzulage). Contrary to often-held beliefs, the German case demonstrates that reforming homeowner subsidies is not politically impossible. The paper also shows that the German political economy has relied less on housing consumption or debt to fuel economic growth.