Normalization of the Housing Market

The discussions concerning housing problems are typically structured by background assumptions between two main poles: housing as the home to people and housing as a commodity. Whereas neoclassical approaches attempt to moderate this ‘dualist notion of housing’, approaches in the tradition of political economy locate it as one cause of modern-day housing problems. Legal scholarship has only started to address this conflict. In doing so, the umbrella of Law and Political Economy (LPE) offers a productive approach. Its main impulse is to uncover the underlying assumptions that shape law and legal discourse. Of course, LPE doesn’t hold answers to every aspect of housing policies, like legislative competence. But it sharpens our understanding of how economic thought has shaped legal reality.

LPE as a research program

Broken down, LPE can be understood as a research program, which consists of at least three components. As a reaction to the neoclassical premises and methods of Law and Economics, LPE scholars aim to uncover the impact of these premises and offer alternative views. Following this notion, LPE, firstly, is an impulse to deconstruct the structures of economic thought and arguments in law and legal science. Secondly, LPE demands for a critique of the unveiled economic thought. Thirdly, building on the findings of analysis and critique, it offers proposals of how to reconfigure law and legal thought. Applied to housing law, LPE is an impulse to analyze the evolution of housing policies, the underlying legislative assumptions and the role of law in this process. In adopting such a ‘materialist’ approach, it can be shown how the Federal German Housing Policies follow a path dependence of marketization set up in the 1950ies and early 1970ies (in the context of common good housing see here). How housing was construed – primarily as a commodity, secondarily as a home – has shaped regulation until today.

The re-introduction of a housing market

Though, of course, some legislative roots reach further back, the Post World War II destructions were an important starting point for the evolution of Federal German Housing Policies. After 1945, Germany suffered a fundamental housing crisis. One of the main legislative goals was, quite literally, to rebuild the country. To manage the shortage, the existing rules remained in effect: rent control, administration of housing, and protection of tenants against eviction. However, these regulations, defamed as ‘command economy’ (‘Zwangswirtschaft’), should only be in place during the severest shortage. Instead, the policies were directed at a housing market system which was set to offer “natural incentives” („natürliche Anreize“, BT-Drs. 1/567, 1950, p. 15) for the construction of new buildings. What is meant by this became most explicit with one of the biggest milestones in housing policy, the so-called Deregulation Act („Abbaugesetz“) of 1960. With this act, the superiority of the market system was – very traditionally – justified by its efficiency: by loosening the tenant protection and housing administration, the “natural allocation” („natürliche Umschichtung“, BT-Drs. 3/1234, 1959, p. 50) of apartments and tenants was supposed to be improved. By reinstating the natural functions of the price mechanism („die freie Preisbildung wieder in ihre natürlichen Funktionen einzusetzen“, BT-Drs. 3/1234, 1959, p. 54), the Adenauer government hoped to attract private investors. From this point of view, the market was construed as “natural” and the housing policies were seen as “unnatural” interventions, which could not be justified any longer. From the perspective of tenants, this meant first and foremost: rising rents.

Housing crisis as a quantitative problem

Following the extraordinary reconstruction efforts of the post-war period, the housing crisis continued – but with a different face. In the late 1960s and early 1970s, the liberalization of tenancy protection led to rising rents, more evictions, and an increased number of recipients of housing benefits. In reaction, the social-liberal coalition enacted a Tenant Protection Act and a Rental Law Improvement Act in 1971. At the core of this legal approach remains the perception of local supply shortage as the root of housing problems (BT-Drs. 6/1549, 1970, p. 1, 6). Hence, increasing supply by inducing supply-sided financial incentives was presented as the real solution. Rent control and tenant protection could only be temporary side measures, which were to be avoided. Even more, they were sought to be reconciled with market thoughts by introducing the comparative rent system (Vergleichsmietensystem), which permits unilaterally imposed rent increases during tenancy agreements and is supposed to model market trends.

Addressing social issues through a market-driven lens

Only three years later, in 1974, tenant protection was implemented for the long run with the Second Tenant Protection Act. This act highlighted the importance of “housing as the center of one’s life” and justified tenant protection irrespective of the market situation (BT-Drs. 7/2011, 1974, p. 7). Still, the interventions imposed by this social element were sought to be reconciled with market functions and were limited by principles like profitability. The acts of the following years formally continued this path – but while still stressing the importance of housing as a “commodity of particular social significance”, they pursued an even “stronger consideration of market elements” (BT-Drs. 9/2079, 1982, p. 7), e.g. with the so-called Act to Increase the Supply of Rental Apartments. While the recognition of housing as a fundamental aspect of life became increasingly explicit, the underlying assumptions continued to be driven by market-focused priorities: housing problems were primarily viewed as a result of shortages, with the proposed solution being to incentivize the supply side.

Applying LPE today: path dependencies of marketization

Over time, the introduction of a liberal housing market in the 1950s and 1960s and the social modifications of the 1970s and 1980s have normalized a perspective on housing as a commodity. They have set a path for today’s perception of housing which places discussions around social questions in a market frame. This can be highlighted with a closer analysis of the so-called “rent brake” (see also my article here, pp. 143-160). The rent brake was introduced in 2015. It works by limiting new rental agreements to the local reference rent plus a 10 % increase (§ 556 d para 1 BGB). At first glance, it appears to be an instrument which lays weight on housing as a home by ensuring affordable rents and interfering with the price mechanism. Looking closer, however, it perpetuates housing as a commodity.

In line with previous legislation, the rent brake is once again not regarded as a genuine solution to housing problems. Increasing rents are not perceived as a problem per se – the market failing to provide affordable housing. Instead, they signify that the market is working as intended: rising rents indicate a housing shortage, and redirect investments. Hence, the rent brake is apprehended as an unwanted price measure which might be necessary in the short term to reduce social risks – but carries the danger of hindering investments (BT-Drs. 18/3121, 2014, pp. 21, 31). Therefore, it is conceptualized as a limited instrument: limited to local markets with housing shortage and limited for 5-year periods (§ 556 d para 2 BGB). Also, newly constructed buildings and modernized apartments are excepted from the rent brake (§ 556 f BGB). Though affecting the price mechanism, the rent brake continues the many market-based lines of thought from the past.

Over time, the picture painted by Federal German housing law, including the rent brake, has become very persuasive. If rising rents are traced back mainly to supply shortage, the go-to counter-measure is expanding supply by the construction of new buildings. Following a neoclassical approach, this is primarily achieved by the prospect of profit and is threatened by price regulation. This assumption seems so natural that we don’t question it. But legal scholars should!

Broadening the horizon: the contrast of sociological housing studies

Such a deconstruction of economic thought strongly benefits from an integration of findings of other academic disciplines, like sociological housing studies. Two of their arguments shall be outlined briefly: Firstly, housing studies find little to no empirical proof that the construction of only market-induced – high-priced – new buildings takes the pressure off the rents in other segments. It may create room for some households, but is often accompanied by rising rents – especially, where there is already shortage: Where it is most needed, the filtering effect doesn’t help. Even in theory, the expansion of supply would have to be enormous. In reality, it is limited by the capacities of the construction economy, its costs and considerations of climate impacts and demographic change. So, instead of market-induced construction, housing scholars advocate for targeted, subsidized construction of affordable housing. Secondly, sociological housing studies discuss additional factors which influence rents. Especially financialization is made out as an important development. A closer look on these financialized actors reveals that private housing corporations, and especially financialized housing corporations, have never been strong on construction: a significant part of the reconstruction work after World War II was achieved by not-for-profit housing companies and government funding of social housing construction (see here, pp. 13, 14). This is still true today: the big private housing companies do scarcely invest in construction and maintenance (see here, pp. 8, 9). Instead – in accordance with their orientation towards the financial markets – they look for leverage through modernization and for short-term profit, profiting from housing shortage and high rents (see further here, pp. 90, 104 ff, here, pp. 70, 88 ff).

Lessons to learn

From a very early moment on, Federal German housing policies embraced market-based economic thinking, naturalizing – and over time normalizing – market functions and introducing a housing market. Housing problems were seen as a question of supply and demand, which could be solved by a liberal rental regime and through the social capacity of the market. Following this notion, housing policies attempt to moderate the conflict between housing as a home and housing as a commodity. The social elements are intended to be achieved through market means. This leads to lawmaking which always fears interfering with the market mechanisms and prefers temporary measures and housing benefits, thereby funding increasing rent demands.

Unfolding and contrasting the economic assumptions which shape the housing policies of today can rationalize and refocus the political debates. This is why legal scholars should incorporate LPE questions and methods into their work. Such LPE-inspired analyses especially profit from the findings of different scientific disciplines, which open up intellectual space beyond the hegemonical economic interpretation.

In the face of an ongoing housing crisis, LPE calls for a renewed analysis of housing policies. It offers a research program which allows to deconstruct and critique the ongoing naturalization of market mechanisms. By incorporating findings of other disciplines, it might advance the scope of action and contribute to securing housing as home.