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Reflections on the curious contrast of public policies between Germany and the US: Real estate versus human capital

From VoxEU by Joshua Aizenman, Ilan Noy:

During the years leading to the global crisis, the US and Germany were the dominant growth poles in the Americas and Europe, respectively (ADD CITE). Their position reflected their growth performance and their dominant size. Both countries were characterised by contrasting patterns of public policies towards home ownership and education – the US put greater public commitment to subsiding home ownership, whereas Germany put much greater public commitment towards education and vocational training.

The US has prioritised housing ownership, promoted by preferential tax treatment of mortgages and home ownership, subsidising quasi-public institutions designed to deepen the ownership of real estate.1  In the US, there is a lower and declining public commitment towards subsidising quality education (pre-school, primary, secondary, vocational, and tertiary levels). In contrast, Germany does not provide public subsidies for home ownership, and has a much deeper residential rental market. Germany is also committed towards deeper support of low-cost quality education, including a well-resourced vocational education and training system, combining public and private funding, aiming at preparing blue collar workers for the challenges facing labour in the modern economy.2

The residential housing market, key trends, 1994-2006

Before the global financial crisis, the home ownership rate for the US trended upwards, from about 64% in 1994, to a peak of 69% in the mid-2000s, presently at 66%, and declining (USHOWN, St. Louis FED). In contrast, home ownership rates in Germany have been stable, at about 40%, and among the lowest in Europe.3  The patterns of the appreciation of real estate, exhibited by Figure 1, illustrate the huge gap in policy outcomes. During the lead up to the global financial crisis, 1994-2006, home prices in the US exhibited cumulative nominal appreciation of 115%, whereas in Germany there was a nominal depreciation of 4%. While the housing boom in the US cannot be attributed only to the preferential tax treatments of mortgages, the interaction of this policy with other contributing factors played a role in accounting for the remarkable US real estate boom-bust cycle.4  While the interest rate in Germany was at a comparable level to that of the US, most of the other factors that played a role in the US were absent in Germany, inducing a remarkable decline in the relative real price of real estate.

Figure 1. Housing index (1994=100)

Source: Aizenman and Jinjarak (2009).

Manufacturing, key trends, 1994-2006

The decline of the manufacturing share in GDP is a common feature of convergence and the development of the services sector, and has characterised the global economy in recent decades.


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