Even though housing prices in Germany are low by international standards, housing in urban areas has become less affordable. Since 2018, certain families aspiring to become homeowners may apply for a capital subsidy (Baukindergeld) that contributes to their down-payment. This paper analyzes whether this subsidy is an appropriate policy instrument to achieve the desired goals.
The paper presents an equilibrium model with two types of households (low- and high-income) and two types of houses (low- and high-quality) to examine equilibrium prices before and after the introduction of a subsidy.
This subsidy not only makes owning less affordable for the lower-income household but also increases the prices of more expensive houses that are not within reach of lower-income households.
Because this policy has just come into effect in 2018 and no data are available yet, the implications of the model are yet to be tested.
The implications of the subsidy run counter to its intentions as house prices will rise even further. Other policies or fewer regulations for new construction may be more effective.
An instrument aiming to relieve financially weaker families, this subsidy will increase prices for all house types, assuming continuing supply shortages observed in the German urban housing markets.
This is the first paper on Germany’s new homeownership subsidy. The model is general enough to be used with any explicit demand and supply functions and is thus applicable to other markets with low supply elasticities.
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