Article

Housing costs and basic services: When cities price themselves out of workers

Cities urgently need teachers and other civil servants. But high rents could just put off the move to the centers.

August 29, 2019

The summer break is over, and the new school year has recommenced in all of Germany’s federal states. However, many schools are once again scrambling to fill vacant teaching positions, a factor which has become a key talking point in many educational institutes. The private sector has long talked about the war for talent, but the public sector seems to be quietly losing the battle, at least in cities.

Just as companies need clever young minds, cities require nurses, day care workers, police officers and elementary school teachers. This time of year, in particular, casts an intense spotlight on the current struggle to find enough teachers to fill positions. However, many regions also labour year-round to attract new and seasoned professionals willing to work for modest public-sector salaries. Many factors are obviously at play, but one of the most critical is surely the high cost of housing. It’s a vicious cycle: more people move to the city which makes rural life less attractive, and in turn, the number of people moving to cities continues to increase. The resulting vacuum drags down housing demand, rents and costs in the countryside. Meanwhile, the urban populations continue to swell, in turn, housing becomes scarcer and more public services are needed. Unfortunately, the people who actually provide public services are finding it harder to afford living in the cities where they work.

High rents even for college-educated career starters

This problem can be readily illustrated using elementary school teachers. There are few other professions where salaries are so consistently documented nationwide. While elementary school teachers do earn salaries in the middle to upper ranges of government pay scales, housing costs still consume a large, fast-growing share of their salaries. These costs are even less affordable for employees who fall lower on the pay scale.

One common way to quantify the impact of housing costs on household budgets is the rent-to-income ratio. It describes the ratio between total rent (without utilities or service charges) and net income (for a teacher, in our example). Disposable net income is defined as the mean net income for different tax classes, which obviously ignores the fact that incomes can vary considerably from one person to the next. Our analysis is based on a single-person household and the average new asking rent for an apartment with 70 m2 of living space.

Rural regions lower the average

The nationwide rent-to-income ratio for German elementary school teachers seems moderate, even for the lowest-earning members of this group: entry-level employees who are not civil servants (E11, Tier 1*). “For around 30 percent of elementary school teachers who work under conventional employment contracts, the rent-to-income ratio is between 20 and 25 percent at the start of their careers. Approximately 17 percent of them spend even less on rent,” explained Dr Sören Gröbel, Senior Research Analyst at JLL. It is worth noting, however, that more than 20 percent of these teachers nationwide – the second-largest group, after all – have rent-to-income ratios in excess of 35 percent. The ratio is likely driven up by the high rents in cities, which also have much higher concentrations of teachers than the sparsely populated countryside.

Rent-to-income ratios naturally decrease as incomes rise following a promotion to a higher pay scale tier or acceptance into civil service, for example. The ratio falls to a mere 20 percent or below for over half of elementary school teachers at the highest tier, Tier 6 (assuming no change from the E11 pay scale). Only 3 percent of the members in this group spend more than 35 percent of their net income on housing. Teachers employed as civil servants are in roughly the same circumstances in the A12 pay scale and are significantly better off in A13. More than two-thirds of teachers in this latter group spend less than 20 percent of their incomes on housing.

Over one-third of income on rent alone in big cities

The story is very different when considering big cities. Rent-to-income ratios are a moderate 20 to 25 percent in cities such as Leipzig, Dresden or Essen, even for elementary school teachers at the lower end of the pay scale. They are much higher – over 35 percent – in the majority of western German cities observed, including Munich, Cologne, Hamburg and Frankfurt am Main. “Munich has an exorbitant rent-to-income ratio in our example for elementary school teachers – no surprise given its notoriously high housing costs. Even after 15 years of pay raises, teachers living in Munich still have rent-to-income ratios of 35 percent or more,” explained Gröbel. In other cities, by contrast, the ratios generally decline significantly to between 30 and 35 percent or even less. Once again, conventionally employed teachers are in much the same situation as their civil-servant colleagues in the A12 pay scale.

Relocation spells deprivation for newly minted professionals

These are alarming figures, especially for those just beginning their careers, and many of them choose to seek their fortunes elsewhere. In turn, this results in the difficulty in filling teaching positions in urban centres. “Moving to a large city will decrease your standard of living considerably. That – along with all the other factors – goes a long way toward explaining why places like Berlin have to hire career changers to fill around 70 percent of their vacancies. The shortfall will only worsen once the baby boomer generation begins to retire – and not just in Berlin, either,” warned Gröbel.

Teachers are just the tip of the iceberg, though. New graduate nurses, for example, are not placed anywhere near the E11 pay scale, but only earn E7 salaries. Mid-level police officers start out on the A7 pay scale, while day care workers generally draw S6 salaries. Actual monthly pay, in euros and cents, varies depending on several factors, with differences between federal states being just one example. However, one thing is clear: Anyone working these jobs has much less money available to pay rent than elementary school teachers.

More building, less blaming

We must not forget that these people are required to provide public services and maintain law and order. As are many other professions that we have not mentioned here. Public sector workers are needed in far greater numbers in cities than in rural areas – and they have to live somewhere. Clearly, it is up to society to provide sufficient housing for them. Unfortunately, governments take great delight in passing the blame on to investors and landlords while blithely overlooking their own failures. It comes as no surprise, then, that less public housing is being built and fewer building permits are being issued.

High rent-to-income ratios for young teachers is not a purely German problem, either. The situation is much worse for career starters in US cities, for example. According to an analysis by USA Today, rent-to-income ratios are above 30 percent in 278 of the 291 metropolitan areas studied. In short, rent devours a huge slice of income in more than 95 percent of US cities.

Create better conditions for suburbs and exurbs

Politicians must do more than just build more homes in cities, where space is obviously limited (although many places still have considerable potential for growth). “It’s time for us to develop and more deeply integrate suburbs and exurbs into the city infrastructure. That means the condition of our roads, railways and public transit systems has a real impact on real estate. Millions of commuters struggle with sparse or unreliable transport links, particularly on the outskirts of large urban areas,” said Dr Konstantin Kortmann, JLL Head of Residential Investment Germany. Politicians and government officials need to take action by finally creating the right conditions and zoning the land appropriately. And this must happen, even over the dissatisfaction of current residents, if necessary. Otherwise, if nothing is done, cities could soon see an exodus of elementary school teachers – along with many other much-needed professionals.

*German public servants are generally compensated according to professional level, education and experience, expressed in an alphanumeric classification.

Dr. Konstantin Kortmann
Head of Residential Investment Germany
Dr. Sören Gröbel
Senior Research Analyst