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07 02 2019
Rent Freeze May be Extended

In their coalition agreement, the Christian Democrat bloc and Social Democrats had agreed to evaluate the rent control measure commonly known as “rent freeze” in regard to its effectiveness—a promise the governing Grand Coalition just made good on. The German Institute for Economic Research (DIW) was commissioned by the Federal Ministry of Justice to analyse whether or not the rent freeze actually influences the development of rents.1 The survey results show that the instrument moderately slows the rental uplift—prompting Katharina Barley, the Federal Minister of Justice and a Social Democrat, to propose an extension to the originally temporary rent freeze.

According to the DIW’s expert opinion, rental flats located in an area covered by a rent freeze are between two and four percent more affordable than flats in an area not rent controlled.2 Moreover, there is evidence suggesting that investments in new-build housing are made more profitable by local rent freezes and that the latter could therefore stimulate housing construction in such areas.

 

Scientists Caution against Further Tightening

That the rent freeze does not nearly suffice as stimulus for increased housing construction is, of course, illustrated by the number of planning permissions, which is overly slow to rise or even stagnates in places.3 The German Institute for Economic Research, which compiled the expert opinion on the rent freeze, urgently recommends therefore to leave the currently permitted exceptions to the rent freeze unchanged. The scientists clearly reject conceivable ideas to further tighten the rent freeze, e.g. by applying it to new-build or comprehensively refurbished buildings as well.

If additional constraints were to be adopted, “adverse effects for the housing construction are to be expected because investors would seriously lose faith,” as the scientists wrote. For the same reasons, the DIW institute considers it counterproductive to make the rent freeze permanent. So far, rent freezes, whose legal basis has been in effect since June 2015, have been limited to five years.

 

Regulation Should Not be Sole Policy Concern

However, the Federal Minister of Justice is toying with the idea of a five-year extension. Katharina Barley would like to retain the instrument because the DIW’s expert opinion returned the finding that the rent freeze does have an—albeit small—effect.

Meanwhile, the DIW scientists urged the body politic in their expert opinion not to focus on regulatory measures alone. They quoted the explanatory memorandum to the law to recall that the rent freeze had been intended as just one of several instruments within the framework of a more comprehensive housing policy. The idea had been to use the five years of an imposed rent freeze to boost housing construction to the point where the regulatory instrument would no longer be needed at the end of the five-year period. While this was the original plan, no housing construction initiative worthy of the name has materialised so far.

 


1 www.bmjv.de/SharedDocs/Downloads/DE/Ministerium/ForschungUndWissenschaft/MPB_Gutachten_DIW_Kurzfassung.pdf;jsessionid=C0987183B814E42C82EE5110557ADE4B.1_cid334?__blob=publicationFile&v=2
2 www.welt.de/finanzen/immobilien/article187641796/Wohnungsnot-Katarina-Barley-will-Mietpreisbremse-verlaengern.html
3 www.destatis.de/DE/PresseService/Presse/Pressemitteilungen/2019/01/PD19_023_31111.html