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25 05 2017
Rising Rents: Rent Freeze Has No Effect

This coming June will mark the second anniversary of the rent control measure colloquially called the “rent freeze” (“Mietpreisbremse”). At the time, the Federal Government had initiated the measure in order to curb the rental uplift in areas with a strained housing market. Wherever the rent freeze is imposed, rents on new leases must not exceed the local reference rent by more than ten percent – these are the parameters. But the measure’s scorecard at the end of its first two years is rather sobering.

Rents Show Upward Trend Nationwide

Rents in Germany have been going up steadily since 2010. While the trend used to affect mainly urban real estate, it has lately extended to rural regions, and is gathering momentum. Compared to the major cities, however, the situation remains relatively stable because the incoming migration is not quite as voluminous as in urban areas. Still, the local reference rents went up by 1.8 percent across Germany last year. Driving force behind the trend is the dynamic growth of rents on new leases. The development illustrates that the rent freeze appears to the ineffective.

Munich the Most Expensive City

The ineffectiveness of rent control is particularly evident in the Bavarian state capital. Here, the average net rent climbed to 11.18 euros per square metre last year, which is 71 percent above the national rent average. Other metropolises in the top group of Germany’s priciest cities include Stuttgart, Cologne, Frankfurt am Main and Hamburg. It is generally safe to say that economically prospering cities show a higher demand for housing, and that rent levels are fastest to rise in cities whose housing markets are drying up.

Loopholes in the Rent Freeze

Quoting a rent rate that exceeds the cap is not necessarily unlawful even in rent freeze areas. The subletting of accommodation, for instance, is exempt. Another exception applies to excessive rents already paid by the previous tenant, which do not have to be lowered when re-letting the apartment. With this in mind, the DMB German Tenant Union has asked for a tightening of the legal measure. It has proposed the introduction of a nationwide rent freeze that eliminates the exceptions – or in any case would require landlords to provide verifiable evidence why they should be exempt from the rent freeze.

Stepping up Housing Development

A sustainable response to the upward momentum of residential rents would be the creation of more housing. Since there is not end in sight to the city-bound migration, the obvious way to ease the strain on the metropolitan housing markets is to create more accommodation. Roughly 850,000 new flats are needed in Germany as a whole. Housing development on this magnitude requires the zoning of new urban districts rather than just the densification of existing ones. Although tightening the rent freeze might indeed ease the strain on the housing market for a short while, it does not qualify as a long-term solution.

Micro-Apartments as Alternative on the Housing Market

One alternative that could provide affordable housing is the creation of micro-apartments. Since the number of single-person households in Germany keeps going up, these small and affordable residential units represent a solution likely to appeal to flat hunters and investors alike. More than 40 percent of all German households consists of one person only – but the compact residential format is also a great alternative for commuters and students. Inversely, what makes micro-apartments so attractive for investors is the fact that their rent revenues and returns are higher than those of conventional new-build flats.