Masters of Inflation – the Ordnungsliberal thinkers

One of the many pleasures of Jim Kemeny’s 1995 work, “From Public Housing to Social Market” is its description of exactly how the Ordnungsliberal thinkers set out to create a social market, a middle way between the excesses of the free market and the command systems of communism. German thinkers passed through a time of intense inflation in the 1920s, which was likely to be in the forefront of their concerns. Those holding assets might see their value increase rapidly whilst cash became almost valueless. Inflation is of immense importance in the public management of property in general and of housing in particular. Jim doesn’t particularly talk about inflation but that is in the historical background.

Readers of Jim’s work will be familiar with how the forces of inflation or rather defeating inflation were harnessed for the benefit of tenants by Ordnungsliberale in rental housing.  This used a combination of

  1. reducing the upfront cost of construction for tenants (below)
  2. cost-renting (not-for-profit, limited profit or no profit landlords) and
  3. a “unitary” housing market where the market is managed as a whole to produce access for all. An important element is policies for social access to housing – does subsidized or cost renting in practical terms only benefit the very poor (England for social housing) or does it benefit everyone (Ordnungsliberal countries)?

The “maturation” of housing stock is a key observation used to even out the lumps and bumps of rental costs. Housing is expensive to produce so that a rent based on finance is initially high and then with the passage of time this cost falls away as finance is paid off, or because inflation reduces the value of the outstanding loan capital. Even two or three per cent per annum inflation in house values all cumulates substantially over the life of a loan. Over time this method would also build up a rental stock, because of its focus on construction.

These Ordnungsliberal approaches can be briefly described (below) but then there are a number of reasons why these approaches might be not possible today because of regulatory restrictions in the law in Europe (also below). It is hard to understand why you would want to restrict the national toolkits of ways to create stability in land markets, given current crises. This account is impressionistic and may be out of date, but there is a debate to be had. I do not purport to be the best expert in either Ordnungsliberalism, German housing policies or econometrics but who is debating this? I use the example of Germany here as the ordnungsliberal country I know most about.

  1. Reducing the upfront costs of construction for tenants:

The first method is financing housing upfront and then removing State support after a time. This could be seen in post-war German “social” contracts with corporate or other landlords of any kind, where the latter might have to take particular kinds of tenants, including the less well off, in return for assistance with construction costs. The social contract attached to the inhabitants would expire after, say, 40 years (12 years recently) and the housing would become just like any other housing, but with the same rent regime. Since housing policy has been devolved to the German regions there may be less of this kind of finance available. This information may now be out of date.

Another way of doing this would be to pool rents so that tenants in older housing effectively finance tenants in newer housing. This could be done by a system of not so much rent control, relatively new in that sense of capping rents in German cities, but by easing rents by area, particularly using information about other rents and delays (the Mietspiegel).

  1. Cost-renting

This involves firstly encouraging “cost-renting” to compete with profit-renting. Landlords who rented only to cover costs could thus charge lower rents, competing with those who did make a profit. This resulted in a general reduction of rents as profit-oriented landlords were forced to lower their rents to find tenants. Lower rents also may also dampen increases in house prices which may be based on such returns, mitigating that inflation.

  1. A unitary market

This approach is described by Jim as the management of the whole rental housing as a single unitary market.  There are other German elements. Cost-shifting and competition with cost-renting to create stability is easier when there are representative bodies to negotiate with and only one major type of rental contract, worked out in detail (the only other type, the Pachtvertrag, seems to be a short vestige of the English and French long leases). The latter ordnungsliberal approach is particular to Germany because Austria uses multiple types of rental contract.

There is a difficulty in bracketing national tenancies together because England and France have two sorts of leases: long ones – longer than 21 or 18 years respectively but usually longer, which are seriously proprietary; and short-term leases which have no perceived capital value. Germany’s leases are indefinite (breaking the fundamental rules of the English and French definitions by length of term). German leases sit squarely between England and France’s two sorts of lease because there is a German break clause for landlords to remove tenants after 30 years on limited grounds (although tenants give much shorter notice, when they will).

German leases have characteristics of both long and short leases as a hybrid. As fulfilling both functions of long and short leases, of course they are more secure than the ubiquitous short lease, mistakenly seen as the only kind. German leases have effectively: the automatic renewal of English and French short leases; and the capital benefit of long leases in their compensation on termination. Any European “harmonization” of that would involve major disruption and imposition on someone, whether landlord or tenant.

At one time, many of the landlords in Germany were controlled by not-for profit organizations such as trade unions or the church that might have sympathy with cost-renting. Large or local tenants’ unions are likely to be listened to. An important but unquantifiable cultural element is a willingness to have the different interests in society represented in ways which mean working together rather than serious opposition between landlord and tenant organizations, other than perhaps as a matter of ritual.

The Dualist Market in England

England in contrast is described by Jim as having a “dualist” market. Writing in the 1995, he suggests that in England social or public housing was segregated from the “free” market so that cost-renting did not compete with historic-cost renting, indeed, it was not allowed to compete with the free market. Social housing became segregated physically from the favoured owned estates and its occupants socially stigmatized because of where they come from– what the French call “a crime of address”. As a lawyer, I talk about England rather than the UK because of important legal differences.

Jim observed that the then English approach to this segregation actually required a great deal of regulation to sustain the separation between the free and state controlled sectors, resulting in command approaches in the social stock to mop up the social consequences of the free market, a safety net. This observation contrasts with English tendencies to criticise of continental managerial systems as involving too much regulation. Nonetheless the particularity of Ordnungsliberal approaches is that they work with the market rather than against it. A policy which did not work with the market was Marktunconform (not conforming to the market).

Probably whether competition between private and public or social markets is a good or bad thing depends on the particular country – whether private landlords have the will to survive to build, repair and have a return of capital or income that is acceptable, relative to downturns and risks generally. A major part of the perceived is the level of trust by landlords based on previous experience of intervention by government.  It is a long and slow job to overcome fears of landlords and tenants about renting, easily undone. German stability has been valued, because foreign investors in the current crisis might have been prepared to accept negative profit from rents in return for expected safety for their capital.

Whither ordnungsliberal methods today?

The use of cost-renting is a primary characteristic of Kemeny’s unitary rental markets but it is likely to be difficult to conduct such a policy in the new Europe. The idea of a dualist housing market, where not-for-profit renting is segregated from the “free market” seems to have won the day for now. This can be seen in at least three areas – competition law, inflation accounting and Human Rights.

The reasons for a hostile environment to this approach cannot be laid at the door of any particular country – It is partly because the European Landlord industry are a united lobby pushing for their own benefit within European institutions as they always have done nationally, At the same time, there is no united European lobby to counter them effectively supporting tenants or other types of occupant. Such support exists at national level. In the EU, principles supporting tenants are hopelessly fragmented between different nations – tenants might use principles such as: property and “the home” (England) social rights (southern Europe) human dignity (Germany) or consumer law. There is no effective and united European defence for non proprietors or limited proprietors in the half-formed European state, even though every nation within it is likely to have such a means of defence.

Competition law and reduced room for public housing policy:

The possibility for Ordnungsliberal upfront subsidy for social landlords for financing construction is probably now diminished, except for tenants most in difficulty. The International Union of Proprietors complained to the EU Competition Commission that there was unfair competition between private landlords and social landlords in France, the Netherlands and Sweden, with their cheaper rents. Private landlords won their case in a negotiated decision, without reasoning given. The alleged unfairness was government subsidy to social landlords, affecting profits of private landlords.

Unfortunately this kind of competition between cost-renting landlords and for-profit landlords was exactly what Ordnungsliberals used to prevent runaway rents in the for-profit sector. This stance was formalized by an EU directive on Social Services of General Economic Interests which allowed spending on the very poor or disadvantaged – all other housing subsidy risks claims of unfair competition.  This story is briefly related in my book Housing Disadvantaged People?

European “social” landlords are not just one kind of organization and do not deserve to be treated by such a monolithic policy, with subsidized social housing only for those in difficulty. They have allocation policies depending on national circumstances and tradition. Typical policies include: housing for everyone (universal or first come first served), housing for workers, housing the poor or housing those in housing need. Housing for local people is common in de facto terms. Universal allocation was a common feature of northern Ordoliberal European housing in northern Europe and tended to be both flexible, and a bulwark against social segregation of the poorest people in stigmatized housing. Often it is housing not built for the less well-off can be later used by them rather than housing specifically built for limited budgets. Housing organizations in Sweden and the Netherlands in particular have had to separate their housing stock into the “social” and other housing. Is this social segregation already? Nimbyism by local residents is an underestimated force.

Inflation accounting

Inflation accounting has an unintended but insidious influence on rents, a global problem – The accounts of businesses and public authorities alike everywhere have always used and still use historic-cost accounting. A home is entered in the books at the price at which it is purchased, and a rent based on the original historic cost price will tend to get lower and lower. The landlord is not making a paper loss and a social landlord may sit back satisfied that its duty to its clients is done. There is also maturation which can be deployed to manage the stock.

In about the 1970s, it was thought fair for accountants to record the current value of assets in balance sheets, not without controversy.  This gave a better sense of the current value of a business for investors and buyers. This mode of recording assets is global since accountants are much more globally organized in their international coordination than lawyers, using the global Generally Accepted Account Principles (GAAP) and similar rules for companies

Now the inflation adjusted figure offers the investors and public auditors a tantalizing view of what return should be expected because of the higher inflation adjusted figure, whether recoverable or not.  Is this a drive to higher rents? More pushy investors and taxpayers might immediately feel that companies should be making the profits that the inflation-adjusted valuation suggests and that their management is failing if they do not. More than this that landlords should not simply be repaying capital. Not much that can be done about this, except to allow specific Ordoliberal considerations where the benefits of inflation benefit the next generation or renters. Probably a counter principle or exemption from performing to inflation standards is needed for housing, because inflation accounting is necessary for transparency.

The Human Rights to property and inflation:

Landlords have what is often known as the “right to property” in Article 1 of Protocol 1 of the European Convention on Human Rights (ECHR). It is a problem that tenants’ do not in practical terms seem have any equivalent right of action in the European Court of Human Rights to landlords, only the inferior collective complaint under the European Social Charter (article 31).

There is an English view that both landlord and tenant have the same kind of proprietary right (an “estate”) which leads to equal rights to petition in every judicial forum, even if the terms of letting are inferior. In the ECHR, the “right to property” is actually a right to “possessions” in the English version and it would not have been unreasonable at the time to suppose that tenants had such a right – Tenants in England and Germany have an explicit right to possession and French tenants only have exclusive enjoyment. The modern difference is not functionally substantial, but it is or was a divisive issue of principle. (England – see Street v Mountford. Germany – tenants have unmediated possession whilst landlords have mediated possession)

The European Court of Human Rights (‘ECtHR’) have increasingly become involved in the question of landlord and tenant rights, culminating on a view on inflation and rents, creating the so-called “right to profit” for landlords, expressed by rights to evict and to increase rents. Hutten-Czapska v Poland is a case which changed the rules of the game of property. After 1990, many ex-communist tenants were paying low rents, and the vast majority purchased their own homes, in return for small sums of money. The problem was a small remaining percentage of secure tenants at a low rent. There were complicating factors, such as justice to the pre-revolutionary owners of the land who became landlords, the fact that tenants had done their own repairs and that this tenure was considered a property right (a socialist usufruct). It is difficult for an outsider to judge the effect of the case, but it seems unfair to promote some ex-communist tenants to owners and demote others to insecure tenants. Also applying the “right to profit” everywhere is problematic.

It is a problem because it has never been the case that landlords should concretely recover profit except in a limited sense – losses for period of time whilst a market recovers are a normal attribute of landlordism. The idea entrenches inflation even if governments were able to compensate all landlords for losses in a downturn. It disregards tenants ‘ability to pay for this “right to profit”, the antithesis of a market at all since users’ choice is basic to the operation of reducing costs where appropriate. There are debates that could be had.  If the landlord has a profit, surely they should be supplying a service to the tenants (the dominant European conception of full-rent tenancies – those with no capital elecment for the tenant – a tenancy at a “rack rent” in English which is only one kind of tenancy).  A dissenting judge in Hutten-Czapska complained that the tenants in that case were not getting a service of repair, since they had repaired their own homes for years. Thus what service were they paying for?

“The right to profit” also seems to have been created and extended without regard to national traditions or the varying nature of the “tenancy” in Europe which should yield a profit. A particular problem is a failure to debate what a “tenancy” is.  It disregards tenures which have lower rents which might be economically viable on a historic cost basis. All construction or purchase of land by ordinary people requires finance and there are myriad ancient and modern ways of doing this across the EU, and there are an inadequately unexplored set of limited property rights involving payment.  Many of these are low or fixed, or give a discount on renewal of long leases to reflect the fact the “tenant” might have completely replaced the building. Many of these are proprietary.

In the current environment, the conditions of renting are deteriorating and the support for home-ownership is intense. What about the gap between the two? What about Intermediate or more secure tenures between ownership and renting? Will we get an approach amounting to: See a land payment, call it a tenancy at a rack-rent and raise it at the first opportunity? This has already happened in Lindbeck v Norwa.y where conventional renewal of residential construction leases of up to about 30 years historically involved renewal at an agreed low rent. This seems to resemble a hybrid between German rentals and English long leases and both countries should be worried. That renewal was declared contrary to the “right to profit” by the ECtHR.  There are many things to debate which has not as yet happened.

Conclusion – Mastery of inflation and deflation

There is an effective double attack on non-proprietors – the first is the reducing of the status of multiple tenures in Europe which are not short-term tenancies in the normal sense. This means that badly needed intermediate tenures between ownership and renting cannot get off the ground or are misidentified for profit. Fear of this effect might also limit their use. The second is damaged affordability of rents. What is it that causes rents and costs to ratchet up across the whole market to negate real tenant choice or sometimes access at all?  What can be done about it? The first thing is to put in place at European level controls which reflect basic checks on landlord activity which are found at national level insofar as these can be agreed without damaging anyone’s system, including rights to petition. That is much easier said than done, because of conflicts in national principles, but that is another story. The idea that all property law and tenures are fundamentally the same across Europe is simply false and there is insufficient detailed research into this.

The Ordungsliberal example is worthy of study for solutions to current problems. You could say that the problem today for some is deflation, not inflation – well the effects of that can be just as bad for tenants as inflation. It is a question of stability and long-termism. Long-termism is not optional in these areas because of the long time it takes to build housing. These ordnungsliberal approaches could mitigate inflation or deflation, spreading the cost of construction over the life of the building to dampen changes in value, reducing rents in competition with cost-renting (so long as landlords are not driven out of business) and nudging, incentivising or managing the market as a whole in the general interest. This is not always a matter of subsidy but rather how the whole economy bends around property owners or other residents in every provision of any kind passing through parliament in nationally peculiar ways.

We should be observing whether these approaches are useful or possible in a particular context, not banning national traditions which may be needed in the future. The Ordnungsliberals mastered inflation – specifically rents.  Isn’t that needed? Rents do not easily go down.  There are ways in which German law is unsuitable for the UK, for example a large number of temporary “petty” landlords as Jim describes them, who might be as likely to have financial difficulty as their tenants and may have large mortgages to service. Sudden change is generally a problem. Possible solutions depend on the changing context and better information.

Jane Ball

Advertisements

About Jane Ball

Jane is a senior lecturer at the University of Newcastle upon Tyne. After a protracted period in English solicitors' practice she embarked on researching French housing law. Housing law disciplines do not match up internationally so to get the bottom of the problem of housing she ended up studying a rather large range of relevant English and French legal topics, with sociology, economics and history.
This entry was posted in Uncategorized. Bookmark the permalink.