Just read this piece on how badly foreclosure of rental property can effect U.S. renters. Most of the renter's problems described therein would be legally impossible in Germany.
The property owner, Irvine, Calif.-based Bethany Holdings Group, had abandoned the complex and a dozen other large rental properties in the greater Phoenix area after defaulting on hundreds of millions of dollars in loans.
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The Bethany Group meltdown highlights how few protections exist for renters caught in the foreclosure crisis.
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[B]y law, Hoffman said, the receiver is not liable for security deposits from renters who signed leases before the receivership went into effect.
In Germany the security deposits are on a savings bank book and in escrow of the bank. The owner can only access the deposit when he can prove a legal claim against the renter.
[I]n Arizona and at least 30 other states, there is no legal requirement to notify tenants that the property is going through foreclosure
The bankruptcy judge or the receivership manager would have to formally inform a renter in Germany and lay down whereto future rent pays should go.
That is very frightening. In my country leases are not effected by foreclosure at all. The renters contractual rights and obligations always continue through ownership changes.
“These tenants, if they leave, they could be held to the lease if the new owner wants to run it as a rental. If they don’t want to, the landlord could terminate the lease and say you have to get out, very often within five days.”
Five days is a ridiculously short time frame. The legal minimum here is three month, generally for both sides, and the lease is essentially permanent if the owner has no reason to kick one out. As long as one pays the rent and does no harm, the lease can not be terminated. Even if a new owner tries to terminate the lease with the claim to need to live in the leased place her/himself, s/he will have to prove that need.
So the renting laws in my country are much more renter friendly than in the U.S. and looking into why this is the case I find a hen or egg problem, i.e which was first, in homeownership rates.
The historic homeownership rate in the U.S. is some 65% (currently still a bit higher because of the housing boom). That is 65% of households are living in a place they (or their mortgage bank) own. In Europe the homeownership rate varies widely from country to country.
A 2004 paper tries to find the reason for the extreme differences:
The Southern European countries have the highest levels of owner occupation. Among the EU 15 countries Spain, Greece and Italy all have owner occupation rates of 80% or more. And Germany, while a much larger economy than those countries in the South, has an ownership rate of only 42%. … Hungary has the highest rate of owner occupation at 92%, while the rate in the Czech Republic is only half of this.
The paper does not come to a conclusion but it explores various reasons for the huge differences in homeownership rate – tradition, family patterns, land use etc. It misses two though which I think explain quite a bit.
- War damage and a flood of ethnic cleansed refugees after WWII has likely much to do with this. In Germany lots of people arrived from the pre-war east Germany (much of today's Poland which was moved west itself) in today's Germany and that is certainly a reason that led to building large, new and often state financed renting complexes after the second world war. Unlike in Thatcher's Great Britain these were never sold of to private ownership but are still in the hands of public cooperatives.
- The legal environment that equalized owners and renters rights removes a lot of incentives to own a home. Why should I own if it is less bothersome and often even cheaper to rent than to own? The 'my home is my castle' mentality is the same for German owner and renters because the renters have a lot of legal security.
The hen-egg problem is that it is difficult to answer whether good legal protection for renters were first and caused a low homeownership rate or if the majority of the people being renters drove a political process that put strong pro-renter laws into the code of law. Did legal protection furthered renting or did renting further legal protection?
To close:
I find the high homeownership rate in the U.S. inefficient. People in the U.S. tend to move more often than in Germany and transaction costs for selling a home and buying a new one are a lot higher than moving from a rental to another rental. More renting would likely be more efficient for the U.S. economy as a whole.
On the other side the homeownership rate in Germany could be higher and still efficient if lease laws would favor renters less, building standard codes would be lowered and zoning laws less restrictive. Then again – do we really want more evictions, sheds and suburbs?
The renter/lease laws in the U.S. are brutal and unjust. If a renter A has a leasing contract with B and C takes over from B due to B's foreclosure or whatever why should A's contractual rights change in that case at all?
On the other side of that argument it is currently demanded by some, including by yours truly, to give some bond owners a haircut, i.e. reduce the value of the contract bondholder A has with bank B because B screwed up and the government, C, foreclosures B and takes over B's assets.
Is there a principled right view in this? Favor small people over big money – yes. But what about the grandma that bought Lehman bonds to finance here retirement? I'll have to think more about this.
Anyway:
The huge variance in homeownership in different countries is a quite interesting phenomenon.
- How is the situation in your country/place?
- What homeownership rate do you think is best as a policy goal?
- How could it be achieved?
Thanks for letting all of us know.