German housing market: Rent cap will exacerbate the tense situation

The Berlin Senate made up of a red-red-green coalition has scored a direct hit with its rent cap agreed in a benchmark paper on Tuesday of this week. For days, the press has been reporting about how hard-hit tenants are to be provided with affordable apartments. This has gone down well with the general public. A recent survey showed 60% of respondents to be in favour of introducing a rent cap. Given this success, it comes as no surprise to learn that demands are already being made for a nationwide rent cap.

The fact that the legal foundations for such a project are doubtful and that it is unsuitable for solving the tense situation on housing markets is evidently of secondary importance. It is therefore questionable whether the Berlin Senate has legislative competence for the tenancy law regulated in the German Civil Code (BGB). And the problems on the housing market are likely to worsen. Not only but especially in the conurbations, apartments are in short supply due to the failure in most cases to cater for the huge numbers of persons moving into inner cities by ensuring sufficient housing construction. Rents have risen in line with this trend. In Berlin they have risen by around 70% within ten years, albeit from a moderate level. This is creating a great deal of resentment among the public, especially since less than one fifth of households in Berlin are living within their own four walls.

Nationwide demand for new construction estimated in the region of 400,000 apartments has still not been met – despite brisk investor interest in the housing market and rising rents. By 2016, completion figures had risen to around 280,000 apartments and have stagnated at this level ever since. The main obstacles to residential construction are the lack of building spaces, high capacity utilization in the construction industry, complex building regulations and arduous approval processes. Moreover, construction costs for residential property are rising rapidly. On the other hand, rent increases seem to be decelerating. The high rent burden on households and the gradual growth in the supply of new housing are dampening the rise in rents.

The best way to more effectively balance demand and supply on the housing market is to expand new construction. However, this goal will not be achieved by the rent cap or other regulatory market interventions. On the contrary, measures such as the planned five-year rent freeze in Berlin will make it less attractive to invest in the housing market. But new housing construction is not the only afflicted area. Even socially-minded landlords have to rely on rent increases in order to keep their buildings in good shape. If no renovations are carried out, the quality of housing supply will suffer in the long term as well as the quantity due to the lack of new construction. Looking ahead, that would worsen the situation for tenants even if no rent increases were made for a period of time. And that’s something no one can really want. On the other hand, the damage to investors will remain within bounds for they can turn to commercial properties as unregulated alternatives on the real estate market. One example is the scarcity of office space, not only in Berlin, accompanied also by rising rents.

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