What does Germany’s new housing policy mean for the market. Klaus Niewöhner-Pape considers the implications of Mietpreisbremse

Renting and the housing market has been a hot topic in Germany for the past two years and was also one of the key issues in last year’s electoral campaign.

Is housing becoming unaffordable? Is city living now only for the rich? Questions like these can be found in the headlines of newspaper reports and talk shows. This has had a real effect on the industry; both the federal and state governments have introduced laws whereby rent increases that are deemed inappropriate will be prohibited.

Before addressing the pros and cons of greater regulation of the housing market and its effects on the markets, the current market situation should be assessed. Indeed, the rents of apartments in many German cities have risen recently. In Berlin, new building rentals experienced growth of 8% compared with the previous year; in other large cities the situation is similar. Although the top rents in Germany’s cities are moderate compared with London or Paris, the increases are causing concern in Germany. 

The essential cause of the rises is the high demand for apartments in Berlin. Cities are the focus point for changing lifestyles, which can significantly push up demand. Whereas in the past the dream of most young families was to have a little “house in the country”, many today would prefer an apartment in the city. Shorter commutes to work, shopping possibilities and doctors, and a better cultural offering are some of the major advantages of the city. 

These reasons are also prompting many elderly people to swap their house in the suburbs for an inner-city flat. In addition, the strength of Germany’s economy is attracting immigrants who tend to settle in the cities. 

The result is higher rents. In good neighbourhoods the rents of new leases deviate strongly from the local reference rent – a type of average of all rents. The difference can sometimes be 20% or more. However, in contrast to areas with limited housing stock and rising rents, there are also many regions in Germany – primarily rural – with declining populations and high and increasing housing vacancies. Rent increases are not an issue in these areas.

The CDU/CSU and SPD federal government, which was elected last year, has introduced – after a difficult struggle – a rent cap, or ‘Mietpreisbremse’, designed to limit rent increases in cities. In theory, in overstretched housing markets the rents of new leases may not be more than 10% above the local reference rent. The federal states will determine which areas have a housing market under pressure, and those areas will maintain that status for up to five years, at which point it will be reviewed. 

Under the current text of the law, new constructions and extensively modernised properties are not subject to the rule in the case of initial letting; therefore prices can still be determined on the basis of supply and demand. Moreover, the rent would not have to be decreased in the case of subsequent re-letting. The law is expected to come into force at the beginning of next year. 

As far as existing rental agreements are concerned, price controls have been in place for a long time, and these were made stricter last year. In areas with an over-stretched housing market, landlords may only raise the rent by a maximum of 15% in a three-year period. In all other areas, the prescribed limit remains at 20%, with the local reference rent constituting the absolute upper limit.   

As with any rule, two major questions arise. Does it attain the objective and help to reduce the housing shortage in cities? And does it have an adverse effect on market development? Most experts say no to the first question. “Price capping treats the symptoms, not the disease,” the German Institute for Economic Research said in a statement.

Indeed, higher rents in individual regions are the result of increasing demand in the face of insufficient supply. For many years not enough housing has been created. And even though the number of new constructions in 2013 (around 215,000) was more than 7% higher than the year before, this did not meet the actual requirement of 250,000-300,000 apartments per year. 

“We need to build, build and build,” is the maxim of the Lord Mayor of Frankfurt am Main Peter Feldmann. Because of the exception to new buildings, rent capping is not working so strongly against this objective, as was originally feared. The ever-stricter building and energy standards that new housing projects must meet constitute a much greater burden because they increase building costs. Higher taxes on the acquisition of land and real estate in Germany are also pushing up costs. In recent years numerous federal states have successively raised the rates of real property transfer tax. In the most northerly federal state, Schleswig-Holstein, it has been 6.5% since the beginning of 2014. This is almost double the rate in 2006, which was 3.5% across the rest of Germany. And in the case of property tax, municipalities are exercising their right to raise the corresponding rates to raise additional tax. 

To return to the question: price capping will probably not improve the situation for tenants in cities where demand is high. In the long run, only new housing can resolve this situation. Yet it is precisely this activity that has been saddled with significant constraints regarding building standards and taxes. 

This leads us to the question of whether capping makes investment in German residential property unattractive. Transaction numbers do not suggest this. The German residential market is popular with investors. According to the real estate service provider CBRE, in the first six months of 2014 transaction volumes for residential portfolios with more than 50 units came to around €7.3bn across Germany, up 19% on the already strong performance of the previous year. Low interest rates, which make housing more attractive as an investment compared with fixed-income investments, is a significant factor behind this development, as are high demand and a healthy economy. 

Investors in German housing are generally institutions looking for long-term, stable returns. The market situation in 2014 differs fundamentally from 2004-07, when financial investors acquired residential portfolios from public stocks, which they intended to hold for a short time while their values rose. On the other hand, investors who hold property for longer tend to be more interested in long-term tenancy arrangements and in maintaining the value of the property.

Creating affordable housing in the desirable areas of the inner cities can hardly be achieved by tinkering with the pricing mechanism – history tells us that this generally leads to misallocation on a large scale. Price capping, in the form expected to be adopted by the federal government, is unlikely to have a harmful effect on the market. But in all probability, it will also not solve the problem of the housing shortage.

The Federal Building Ministry set up a ‘Task Force for Affordable Housing and Building’ in the summer, bringing together representatives from the real estate industry, politics and consumer associations. 

The role of the task force is to devise solutions to meet the growing demand for housing in certain areas and to jointly address the other issues of the housing market relating to demographic developments and the fight against climate change. 

It remains to be seen whether real sustainable solutions will be found. 

Klaus Niewöhner-Pape is managing director at Industria Wohnen

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