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Regulatory Efforts Continues even as Housing is Already Becoming More Affordable

Few other areas have seen such a whirlwind of political activity as the housing issue. Over the last few months alone, the body politic extended and tightened the existing rent freeze (“Mietpreisbremse”) but also decided to move ahead with the rent index reform, whose consequences will include a lengthened observation period for calculating the local reference rent and a decline or slowed increase of rent index levels on the ground. The latter will have ramifications not just for the passing rents but, as a result of the rent freeze, for asking rents as well.

Wages Rising Faster than Rent Rates

And let us not forget about the rent cap that Berlin’s senate government will introduce, while the debate on whether or not housing companies should be expropriated also continues to simmer at low heat. From the ranks of the Social Democrats, there have even been calls for discouraging the conversion of rental flats into condominiums.1 But are the scope and number of the planned or demanded regulatory measures actually warranted and reasonable? The latest surveys seem to suggest the opposite.

As the IW German Economic Institute found in a recent analysis, tenant households in large parts of Germany are not at all under growing strain. Rather, rental flats in many cities have actually become more affordable over the past years.2 This, by the way, is true not just in rural areas and small towns, because even households in metropolises like Hamburg, Cologne and Frankfurt am Main have found it easier lately to cope with current rent levels. That is because here, wages outpaced rents between 2014 and 2018.

Stepped-up Housing Construction is Slowing Rent Growth

One reason for this trend is, of course, the upward wage development of recent years. Specifically, the gross median wage in Germany rose by 9.4 percent during the aforesaid period, whereas rents increased by only 8.5 percent. In Cologne and Frankfurt, the difference is even more conspicuous, as wages rose by 8.2 and 8.3 percent, respectively, while rents went up by 6.0 percent in either city. Tenants were yet better off in Hamburg, where wages increased by 8.7 percent and rent rates by barely 3.3 percent.

Hamburg is also a particularly fine example for illustrating that another factor plays a definitive role in making housing more affordable, namely the increase in housing construction. The number of flats completed is higher in Hamburg than it is in Berlin, although Berlin has twice as many residents. This explains why housing has become more affordable in Hamburg whereas things in Berlin are the other way round: here, rents grew faster than wages.