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As we reported in REFIRE 232 in May, in a move that has sparked intense debate, Berlin’s ruling traffic-light coalition government officially extended the Mietpreisbremse, or rent control law, until 2029. Among law firms commenting on the decision, Bottermann Khorrami (BK Law) in Berlin has been particularly vocal, warning that this extension could be more of a temporary band-aid than a long-term solution for Germany’s housing woes.
"While the Mietpreisbremse aims to control rent hikes in tight housing markets, its temporary nature must be supported by increased housing construction," says Uwe Bottermann, partner at BK Law. "We see very little of this," he adds, pointing out the glaring lack of efforts to expand the housing supply.
The Mietpreisbremse was introduced in 2015 to curb runaway rent increases in Germany’s most sought-after urban areas. It caps rent hikes at 10% above the local comparative rent for new rental agreements in buildings constructed before 2014. The goal is to protect tenants in cities where demand far outstrips supply, like Berlin, Munich, and Frankfurt.
The regulation primarily impacts landlords and tenants in high-demand areas. Tenants benefit from more stable and predictable rental costs, while landlords face restrictions on how much they can increase rents when new tenants move in.
The Mietpreisbremse applies in designated tight housing markets, typically major metropolitan areas, and is enforced when a new rental agreement is signed. The recent extension means these controls will remain in place until at least 2029.
Why is it controversial?
The Mietpreisbremse has its fair share of supporters and detractors. Tenant associations and some political factions hail it as a necessary safeguard against exploitative rent increases. Conversely, property owners, investors, and economic analysts warn that it could backfire, deterring investment in new housing projects and exacerbating the very shortage it aims to alleviate.
Michael Voigtländer from the Cologne Institute for Economic Research (IW Köln) isn’t convinced of its efficacy. "It has not proved its worth," he asserts, arguing that strict enforcement could stifle investment and hinder development. "Consistent implementation could put the brakes on investment and slow the overall pace of new housing developments," Voigtländer explains. Briefly, the pros and cons:
Pros:
- Tenant Protection: Ensures more stable and affordable housing costs in high-demand areas.
- Market Stability: Aims to bring predictability and reduce the volatility in rental prices.
Cons:
- Investment Deterrence: Critics argue it discourages investment in new housing projects. Andreas Mattner, until recently the president of the real estate lobby group ZIA, warns, "Further tightening of rent control measures could discourage investments, which are vital for alleviating the housing shortage."
- Legal and Implementation Challenges: Landlords often find ways around the rules, and legal battles continue over its constitutionality. Kai Warnecke, president of Haus und Grund, states, "Since the introduction of the rent freeze, the number of missing flats has increased."
Despite the restrictions, landlords DO retain some freedoms:
- New Builds and Modernizations: The regulation does not apply to new buildings constructed after 2014 or extensively modernized properties.
- Temporary Furnished Rentals: Furnished apartments rented on a temporary basis can often be exempt from the rent cap.
- Index-Linked Rents: Landlords can enter into index-linked rental agreements, tying rent increases to inflation rates.
Germany’s extended Mietpreisbremse is likely to significantly influence the real estate landscape, so investors and developers must navigate this regulatory minefield carefully, balancing profitability with compliance.
Experts, understandably, suggest a balanced approach that combines tenant protections with incentives for new housing developments. Encouraging construction through tax incentives or streamlined permitting processes could mitigate the negative impacts of rent controls by increasing supply.
Issue of housing supply still not addressed
Reflecting on the law's effectiveness, the German Institute for Economic Research (DIW) acknowledges that while the Mietpreisbremse has slowed rent increases somewhat, its overall impact remains modest and does not address the core issue of housing supply. "What is needed instead are incentives to build apartments," DIW analysts argue.
From the government's perspective, the extension of the Mietpreisbremse until 2029 promotes the German government’s commitment to tenant protection. However, its broader impacts on investment, urban development, and legal frameworks highlight the need for comprehensive housing policies that foster both economic growth and social equity - both of which have been missing in spades. Without significant efforts to increase housing supply, the Mietpreisbremse will likely fall short of its goals, leaving tenants and landlords in a state of uncertainty.
As Bottermann Khorrami points out, "We need to focus on building more homes, not just capping rents." A balanced approach, combining regulatory measures with incentives for new housing, will be essential to ensuring the long-term health of Germany’s housing market and the overall economy. The debate continues, with the stakes high for all parties involved.
