Germany is facing a housing crisis driven by a severe shortage of affordable homes. Alexander Reisenbichler argues that reframing the crisis as an issue of national economic interest could create the impetus needed to solve it.
Chancellor Friedrich Merz recently called Germany’s housing crisis the “social question of our time”. In doing so, he joined a chorus of policymakers ranging from the Left Party to the market-liberal Free Democrats. While they are not wrong, housing is far more than just a social issue: surging rents and home prices are weakening Europe’s largest economy, making housing also the economic question of the day.
Rising housing costs in recent years have tested the fabric of German society. Long hailed as a renters’ paradise due to its high-quality and affordable rental market, Germany has seen asking rents jump by about 70% and property prices double in just 15 years.
The problem lies in how Berlin frames the issue. When policymakers treat housing as a social question, they consign it to welfare policy. With today’s tight budgets, ambitious social programmes are dead on arrival, particularly in a country still obsessed with balanced budgets.
By casting housing as a social issue, successive governments under Angela Merkel, Olaf Scholz and now Merz have not gone much beyond rhetoric. All have failed (or are on track to fail) to deliver their promise of building 400,000 homes a year.
Their housing programmes – small boosts to social housing, subsidies for first-time buyers and tax breaks for landlords – have lacked bite. Merz’s new “housing construction turbo” initiative to deregulate land-use, accelerate permits and loosen building standards continues Germany’s patchwork approach and is unlikely to deliver affordable homes at scale.
The economic costs of Germany’s housing crisis
Rising housing costs are an assault on Germany’s model of capitalism, weakening Europe’s economic engine. The economic cost is real. Mittelstand employers struggle to attract skilled workers and apprentices in high-cost regions, undermining their competitiveness.
In the absence of decisive government action, employer-based housing is on the rise – but the 700,000 employer-provided homes barely account for 2% of the housing stock. Meanwhile, unions are baking housing costs into wage demands, with potentially inflationary ripple effects across the economy. Rising housing costs are thus undermining the pillars of Modell Deutschland: its skilled workforce, apprenticeship system, low-inflation regime and Mittelstand.
As my new book argues, Germany has treated housing as a matter of national economic interest before. After WWII, the country faced a shortage of 4.6 million homes. With capital scarce, the Adenauer government launched a battery of initiatives – above all, public-private social housing programmes – that helped produce a “housing miracle”. From the late 1950s to the early 1960s, Germany built more housing per capita than any other country. By 1970, half of all new homes – 5.8 million out of 11.4 million total homes – were social housing.
As Figure 1 shows, the country supported building an annual average of about 320,000 social housing units in the 1950s, 240,000 in the 1960s and still 150,000 in the 1970s. As postwar housing shortages eased, social housing construction declined, with the short-lived exception of the post-unification years. By 2020, and despite re-emerging shortages, the number had fallen to barely 23,000 new units and increased only slightly to 37,000 in 2024 – a shadow of what was possible in the postwar decades.
Figure 1: Total housing construction and social housing approvals in Germany, 1950-2024
Source: Adapted from Reisenbichler, Through the Roof, p.83. Note: Social housing construction includes newly approved rental and owner-occupied social housing units per year.
Back then, even staunch market liberals conceded the point. Ludwig Erhard, architect of the postwar economic miracle, reluctantly came to see low housing costs as a tool to contain wage pressures. In a 1951 speech to property owners, Erhard called the housing market – then dominated by social housing and strict rent controls – “a form of capitalism that does not deserve the name”. Yet even Erhard accepted these measures as essential to safeguard Germany’s competitiveness, which depended, he argued, on price stability.
Since the founding of the Federal Republic, housing and industrial needs have been closely intertwined. Despite high national unemployment after WWII, firms in many regions struggled to operate at full capacity because local housing shortages kept workers away. The Länder, responsible for implementing social housing programmes, prioritised building social housing in areas with acute labour demand. Social housing thus functioned as industrial policy, alleviating labour shortages and boosting productivity in Germany’s industrial regions.
Can the German housing crisis be fixed?
The remedy to today’s housing crisis is not cheap. Reversing the decline of the social housing stock – from around three million units in 1990 to just one million today – requires a far stronger role for the state, including a revival of large-scale public-private social housing programmes.
To do so, federal and regional policymakers should deploy the full toolkit of housing instruments – guarantees in financial markets, direct loans, generous tax benefits for limited-profit associations, more efficient land-use regulations and speedier approvals – to turn the housing market around. Crucially, social housing must again be open to lower-middle-class households, as it was until the early 2000s, not just low-income households.
Germany is once again “the sick man of Europe” and housing can be part of the cure. Framing housing as an economic challenge opens the door to a new political consensus. Housing programmes can be cast as industrial policy, supporting the Mittelstand, and as wage policy, limiting wage-cost spirals.
The political right could then claim credit for defending key German industries, while the left could highlight the fight against inequality. Once housing is again understood as a matter of national economic interest, ambitious housing programmes and their price tags will become easier to justify in German politics.
Germany has overcome housing crises far deeper than today’s with political will and smart policy. It could do so again. If the looming social crisis is not enough to spur action, the future of Germany’s economic model at the heart of Europe should be. Merz should take a page from his Christian Democratic predecessors, Adenauer and Erhard. Bold housing action would boost competitiveness, ease skill shortages and contain wage pressures – and in turn strengthen Europe’s economic engine.
For more information, see the author’s new book, Through the Roof: Housing, Capitalism, and the State in America and Germany (Cambridge University Press, 2025).
Note: This article gives the views of the author, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured image credit: European Union
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