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18 07 2019

German Ministry of Justice Seeks to Regulate New-Build Rents as Well

So far, there had basically been a political consensus that red tape and amendments to the landlord-tenant law would be applied to existing properties only while sparing new-build ones as much as possible. This was true even for the “rent freeze” rent control measure that became effective in 2015 and that exempts new-build flats. The waiver was meant to ensure that housing construction, which is so urgently needed in Germany, does not stall, which would exacerbate the problem. But this consent could soon become a thing of the past – because the Federal Ministry of Justice is planning to introduce a rent control measure for new-build housing, too.

This is supposed to be made possible by new legislation for which the Ministry just submitted a draft bill.1 It stipulates that even newly built flats could be restricted in their rent level after a certain period of time. The draft bill for the “Act to Merge and Improve the Provisions Governing the Permissible Rent Level during Housing Shortages” states that only the first lease signed after the completion of a flat is to be permanently exempt from the new provisions.
 

Rent Capped at 20 Percent above the Benchmark Rent

But whenever a new-build flat is re-let, a cap would apply five years after its completion, limiting the rent level to 20 percent above the local reference rent. But even a first letting or lettings within the first five years are supposed to be subject to a usury limit, meaning that a statutory maximum of 50 percent above the benchmark rent must not be exceeded.

In other words, the planned law would introduce a rent freeze in disguise for new-build flats that would kick in after five years and would cap rent hikes at 20 percent above the local reference rent (instead of ten percent above, the cap for existing flats under the original rent freeze). The exemption clause anchored in the original rent freeze legislation would thereby be dismantled.
 

Majority of the Population has Faith in Private Investors

This has caused some concern that the law against exorbitant rents, if it was actually enacted (so far, the Christian Democrat block is balking), would make housing construction much less profitable. Since construction costs keep going up—building prices increased by 29 percent between 2010 and 20182—investors might gradually pull out of housing construction because of its meagre profitability. Moreover, the planning certainty would be eroded for many investors who used to rest assured that, while existing property was impacted by excessive rent regulations, new-build housing would remain unaffected. The housing construction volume is likely to drop even farther behind demand, which would in turn exacerbate the strain on the market.

After all, it is perfectly obvious that the housing development targets will be impossible to meet without the commitment of private investors, and the majority of the population acknowledges the fact. According to a poll commissioned by the ZIA German Property Federation, around 57 percent of all Germany believe that private investors should play an active role in the creation of affordable housing. Around 55 percent are also unconvinced that the public sector would do a better job tackling the problem than the private sector.3 Two out of three respondents take a dim view of recently discussed government interventions, such as expropriations, while half of the respondents are rather critical of rent caps.
 

1 www.haufe.de/immobilien/wirtschaft-politik/zia-umfrage-wohnungsbau-nur-mit-investoren_84342_492730.html
2 www.faz.net/aktuell/finanzen/meine-finanzen/mieten-und-wohnen/warum-das-bauen-viel-zu-teuer-ist-16260788.html (subscribers only)
3 www.haufe.de/immobilien/wirtschaft-politik/zia-umfrage-wohnungsbau-nur-mit-investoren_84342_492730.html