German Housing Policy at an Impasse

Housing is expensive. Many private households know this from personal experience. But public budgets, too, are affected. Consider Germany. Kosten der Unterkunft alone — the rent and heating allowance paid to unemployed households — will cost around €23 billion in 2026, or roughly 0.5% of GDP.

On top of this — and spread across federal, state and municipal budgets — come housing benefits for low-income households in employment (Wohngeld), a homeownership child subsidy (Baukindergeld), grants for social housing construction, support for mortgage savings schemes, and a raft of further public subsidies and tax incentives. In other words: a complex and fragmented policy landscape.

To date, nobody had mapped this landscape in quantitative terms. To the best of our knowledge, there were simply no numbers for overall (German) public spending on housing, let alone a breakdown by instrument or policy type.

Housing Policy in Numbers

We changed that. Analysing numerous current and historic budget publications, we created a new dataset that provides a historical overview of housing policy expenditures in Germany (Schulte et al. 2026). It compiles expenditures at the federal and state (Länder) level since 1965, covering West Germany until 1990 and the entire Federal Republic from 1991 onwards. The data is freely available and can be downloaded here.

We distinguish between two broad categories of housing expenditures. Subject or personal subsidies directly support households (“subjects”) that would otherwise struggle to afford housing. Object or “brick and mortar” subsidies fund the construction, modernisation or acquisition of housing units (“objects”).

These two forms of support create different incentives and distributional effects. Personal subsidies can fuel rent increases in tight housing markets. Object subsidies, on the other hand, can expand the housing stock and thereby — in the best case — stabilise rents and prices. Social housing programmes are particularly effective, as they directly support the creation of affordable housing units.

From Object to Subject Subsidies…

A first glance at the data reveals a striking shift in the focus of German housing policy. Before the turn of the millennium, brick and mortar subsidies accounted for around 80 % of total spending, with personal subsidies making up the remaining 20 %. Today, those shares have flipped (see Figure 1): 80 % of housing policy expenditures are now on personal subsidies.

The turning point came in the early 2000s. On the one hand, brick and mortar subsidies fell sharply: the federal government withdrew from funding social housing, and the Homeownership Subsidy (Eigenheimzulage) — until then the most significant fiscal instrument for promoting homeownership — was abolished under budget consolidation pressure.

At the same time, personal subsidies surged in the wake of Germany’s Hartz welfare reforms. Previously, unemployment insurance recipients received a single overall unemployment benefit, linked to their previous income, with no explicit housing component. If landlords increased the rent, unemployed and employed tenants alike had to absorb it from their personal budgets.

The Hartz reforms de-linked long term unemployment benefits from prior income, replacing them with a low and uniform monthly allowance of 345 Euros (equivalent to roughly 525 Euros today; today, the allowance is 563 Euros). In exchange, the reforms introduced a separate payment (Kosten der Unterkunft) which covers the actual rent and heating costs of long-term unemployed households. If landlords increased the rent, this payment would increase by the same amount. From then on, rising rents directly translated into rising public expenditure.

This benefit structure changed incentives. Prices followed: Rents for households receiving Kosten der Unterkunft have risen significantly faster than rents in general (see Figure 2). This is partly explained by welfare recipients’ newer, typically higher-priced rental contracts. But even assuming that recipients move three times more frequently than the average household, rent increases in this segment since 2012 still outpace the broader market by around 21 percentage points. By boosting households’ effective ability to pay, personal subsidies have contributed to price pressures in the very market segment they were designed to support.

…and Back Again?

A change of course is underway: expenditures on brick and mortar subsidies have risen again in recent years. Federal support for the construction of social housing has increased from its lows of less than one billion euros per year in the 2010s to 2.6 billion in 2026. This is encouraging — though overall brick and mortar subsidies remain well below their (nominal) historical averages.

The overall lesson from our data is sobering. In housing, German fiscal policy has manoeuvred itself into a bind. Restoring brick and mortar subsidies to their historical volume would require fiscal space that neither the federal budget (Schuster-Johnson & Sigl-Glöckner 2025) nor state and municipal budgets currently have. But cutting personal subsidies is equally fraught. Given the political and social stakes of the housing question, any cuts would be more than unpopular: they would be dangerous. And without strong complementary measures, the increasing fiscal costs of homelessness triggered by such cuts would likely outweigh any direct savings. Personal subsidies cushion real hardship — but they address symptoms, not causes.

Finding a way out of this gridlock is a genuine challenge. The recent shift towards brick and mortar subsidies is sensible, but no more than a first step. In future work, we will explore how housing fiscal policy can be redesigned to deliver affordable housing, while remaining fiscally sustainable itself.

This article is a short English-language summary of a broader fiscal history of German housing policy, published in German by Dezernat Zukunft and available in full here.