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DIW: Drawbacks of So-Called Rent Freeze Outweighs its Benefits

“More harm than good”: These are the words the DIW German Institute for Economic Research used to characterise the consequences of the draft bill for the rent control scheme commonly referred to as the “rent freeze” that Justice Minister Heiko Maas (Social Democrats) presented last month. While rents may go down short-term, the temporary decline is outweighed by the long-term drawbacks for lessees and lessors both, the institute argued.

The Rent Freeze in Detail

By introducing the rent freeze, lawmakers intend to put the brakes on surging rents – if only in areas with so-called strained housing markets, meaning the country's metropolises and conurbations. The task of designating these rent control zones falls to the German states. Landlords re-letting a flat in one of these zones may not raise the rent by more than ten percent above the local reference rent. If, however, the rent already exceeded the reference rent by more than ten percent before being put on the market again, it will not have to be lowered. The zoning will be limited to a five-year term, at the end of which the market situation will have to be reassessed.

Consequences: Investments Wilting, Black Market Blooming

The DIW report criticises the introduction of the rent freeze. If the law enters into force in its present form, it will have a number of negative ramifications, or so the DIW researchers fear. Landlords, for instance, might downscale their investments in their own flats because they would be unlikely to recover the cost of the capital improvements through increased rents. As far as re-letting goes, the DIW worries that a black market might form that favours well-to-do prospective tenants. For they would be the ones able to make special payments that would enhance their chances for getting a given flat.

Driving up the Prices of New Units

But existing buildings will not be the only ones affected by the rent freeze. New apartments could also become much more expensive because owners will have to offset their loss in revenues in some way. The Haus & Grund property owners' association did a model calculation suggesting that rents are likely to go up at a rate of 1.00 euro/sqm. Someone who built and let a flat in Berlin-Neukölln in 2013, for instance, will not be able to raise the rent if the apartment was to be re-let, until 2037. This is how long it will take before the reference rent will be adjusted to the current rents for recently completed units.

The currently rising rent rates in Germany's metropolises are a signal that the rate of construction should be stepped up. If this signal is wiped out by the rent freeze, the gap between supply and demand will widen further, according to the DIW researchers.