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There is (almost) nothing as alarming for investors as political populism. Just ask anyone holding French government bonds.
In recent days, the risk premium of these securities (as measured by the spread between French and German 10-year bonds) has surged following the stunning victory of French far-right populists in European parliamentary elections.
Cue investor angst — and rising scrutiny of other resurgent populist rightwing groups that might have inflationary, debt-expanding policies. Donald Trump, the would-be US president, is just one more case in point.
But as jitters mount, it is not only rightwing populists that deserve attention; the leftwing variant might yet spring some surprises, too. That might not seem obvious today: the leftwing parties that are on track to win elections this year — such as Britain’s Labour — are relatively moderate.
But history shows that protest votes can easily flip if one variant of populism fails to deliver what the electorate wants. And corporate boards might be surprised by some of the ideas floating around on Europe’s left-leaning political wing.
Consider, by way of one example, a saga from Berlin’s property sector. A couple of decades ago, the city had what one former mayor labelled a “poor but sexy” reputation: young techies and artists flocked to its graffiti-strewn properties because life seemed cheap.
Then Big Property arrived. Since 2007, a dozen real estate investment groups — such as Deutsche Wohnen, Vonovia, Covivio and Adler — have spent more than €42bn to buy properties there. City planners hoped this would expand the housing supply.
But rents exploded, tripling in neighbourhoods such as Friedrichshain-Kreuzberg and Neukölln, and doubling in outlying regions such as Marzahn-Hellersdorf. And since Berlin is a city where four-fifths of residents rent, this sparked popular anger — particularly among the young who were being squeezed out.
This is not, of course, unique to Germany: as a recent FT series shows, similar stresses exist across the western world. Indeed, on average across the EU some 42 per cent of 25- to 29-year-olds live with their parents due to these pressures, says Eurostat.
But Berlin’s situation is extreme. So is the political response: in 2021 activists organised a non-binding referendum on whether the government should expropriate 240,000 dwellings in the city owned by big investment groups (those with more than 3,000 properties).
Initially, this seemed quixotic. But, as Joanna Kusiak, a Polish-born sociologist and activist, explains in a striking new book Radically Legal, the campaigners built a grassroots coalition. They then invoked little-known provisions of the German constitution, which protect citizens from concentrations of power, to underpin their demands.
When the referendum occurred, it passed with the support of 59 per cent of voters. Mainstream political parties opposed it and demanded a review. But when this was completed last year, it deemed the motion to be constitutional. So the activists are now planning a second — binding — referendum. If that also passes, the Berlin government may end up having to spend billions of euros it currently doesn’t have to buy apartment blocks back from property giants and bring them into public ownership.
That will appal red-blooded, free-market capitalists. And the property companies themselves argue — correctly — that if expropriation does happen, it might be counter-productive, since it will undermine future private investment and hurt anyone with a pension invested in property funds (ie ordinary workers).
Indeed, the whole concept is apt to seem so shocking to Anglo-Saxon onlookers that some might want to ignore this as simply a “made-in-Germany” tale. But extreme or not, the saga is also a canary in the proverbial coal mine. It shows what can happen when popular anger erupts about rising prices — and corporate power.
After all, Berlin is not alone in having politicians who mutter about the need for rent controls. Similar themes are heard in the state of Washington in the US (where median rents jumped 34 per cent between 2001 and 2019) and in the Labour party in the UK (where rents jumped 8.9 per cent in the year to April).
So the lesson that moderate politicians (and anxious real estate investors) need to learn from Berlin is that if they hate the idea of rent controls and/or expropriations, they urgently need to find other ways to counter the rental squeeze, most notably by expanding the housing stock.
One way to do this might be to relax property codes, to make private-sector construction easier. This matters given that investment in housing development shrank from 0.17 per cent of GDP in 2001 to 0.06 per cent in 2018, according to the OECD. Another sensible idea would be to use public money to build social housing. While a third would be to reform the tax system to undo the bias towards owner-occupied properties. The OECD has, for example, proposed replacing transaction taxes on property with an annual tax on land value.
Such policies will not be easy to enact. But the grim truth is that there is almost nothing as likely to hurt faith in capitalism and spark anti-elite populism — on both right and left — as a lack of housing, particularly when immigration is rife. So let us hope centrist politicians urgently act. If not, investors have (another) reason to worry.
