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11 06 2015
Eventful Times: Housing Market Keeps Shifting

Take the historic district protection, the rent freeze, or the new model for the allocation of development land in Berlin – at the moment, Germany's residential property market is subject to a rapid succession of legal changes. As often as not, neither housing companies and landlords nor buyers and tenants benefit from them. The most recent bombshell hit in mid-May when the District Court of Berlin-Charlottenburg declared the city's rental index ineffective. In the eyes of the judge, the index is not based on standard scientific principles. Although the judgement has yet to become legally effective, it casts doubt on the rental index and its usefulness – and thus on the basis underlying the “rent freeze” rent control scheme. What is more: The judgement serves as a signal beyond the city limits of Berlin, and will most likely be the first of many such rulings against local rental indices everywhere in Germany.

Rent Freeze Resting on Shaky Foundation

It remains to be seen what sort of ramifications the legal dispute settled by the District Court of Berlin-Charlottenburg will have for the rent freeze. However, it is safe to say that the foundation underlying the rent freeze in Berlin, namely Berlin's Rental Index, is a shaky one. If the index was indeed declared ineffective, there would be no basis on which to determine the local reference rent – that is, the benchmark for tolerated re-letting rents. Nonetheless, the rent freeze entered into effect in Berlin on 01 June, as planned.

Yet it is obvious that the court judgement on Berlin's Rental Index has made other German states nervous, judging by the response in Hamburg: Just weeks ago, word had it that the rent freeze here would be implemented swiftly. Now, its introduction has been shelved until further notice. The explanation offered by the city's body politic is that more time is needed to consult on the best way forward. What makes this ominous is the fact that Hamburg's rental index is compiled by the F+B, the same institute that also compiled the axed rental index of Berlin. So it is only a matter of time before landlords in Hamburg call the city's supposedly qualified rental index into doubt and take it to court.

Misguided Approach: the Cooperative Building Land Model

With or without an effective rental index – the housing shortage, especially the one on Berlin's housing market, is here to stay. In a move designed to ease the strain on the market, the Senate of Berlin has set itself the goal of completing 10,000 new flats annually. The idea behind the recently presented Berlin model of cooperative land development is, for one thing, to keep a lid on the costs for city hall. On the other hand, the Senate seeks to ensure that housing construction does not just cover the high end of the market but meets the housing needs of all social strata. According to the new model, project sponsors are to pay for all costs that would normally be borne by the State of Berlin. This includes the financing and realisation of day-care centres for children and elementary schools whenever a given housing development generates extra demand in preschool and elementary school slots. In addition, anywhere between ten and 33 percent of the flats created will be subject to rent caps and tenant selection requirements. In short: The model will force investors to fund things for which the public realm is actually responsible.

The scheme is inspired by the notion that those who stand to benefit substantially from Berlin's urban development planning should pitch in with the costs for the city's development. Property and project developers have to consent to the parameters of the model if these are to apply to their project. Otherwise, they will still be able to go ahead with their project, but the city's planning authorities will de-prioritise the processing of their planning applications. The transitional period until the model becomes effective in 2016 will be governed by an interim solution. There is reason to doubt that the cooperative land development model proposed by the Senate of Berlin will actually boost housing construction in the city. It is much more likely that the model will have a retarding effect because it places an extreme burden on project developers.

Historic District Protection and Condominium Conversion Ban: a Setback for the Housing Market

Historic district protection in Berlin and other German cities is increasingly becoming an issue, and for property asset holders and private condominium buyers more so than for project developers. So called luxury refurbishment are banned from areas subject to historic district protection. Incumbent tenants are to be protected against displacement by rising rent rates. As a result, all modernisation works are subject to planning approvals. Since March of this year, the conversion of rental into freehold units in historic district protection area is also subject to approval. In practice, this is tantamount to outlawing the entitlement process for condominium conversions altogether. Tenants in historic district protection areas who would like to buy the flats they occupy as part of their pension plans will be kept from doing so under the condominium conversion ban.

Rent freeze, condominium conversion ban and the Berlin model of cooperative land development – all of these measures will ultimately do nothing to ease the strain on the housing market of Berlin or any other city. Meanwhile, the only way to check the upward trend of rents and prices is to build more homes. Promoting construction would thus be the thing to do – by creating incentives for investors to enter the housing market. Sad to say, recent policy measures all seem to be doing the opposite.