Has Germany Figured Out the Way to Keep Rents Affordable?

The country has passed new set of rules to make sure city dwellers don't get priced out of their neighborhoods. Will it work?

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Reuters

From the outside, Germany looks like a renter's paradise. Worried about being evicted from your German apartment? It'll only happens if you don't pay the rent, or if your landlord him or herself wants to move in. Afraid your rent will skyrocket overnight? It can't really. Rent increases on existing contracts are capped at 20 percent over three years, following a first year where no increase is permitted. Sure, tenants also have extra responsibilities – they need to give three months notice before moving out, and often do their own renovations. Still, renters looking wistfully towards Germany from Paris, London or New York could hardly be blamed for feeling a stab of envy.

But according to Germany's new coalition government, these protections just aren’t enough.

For Germany's major cities, current rules haven't stopped rent levels reaching ever higher spikes. In Munich, Hamburg, and Berlin, rents have been skyrocketing (by German standards), with landlords both increasing rents on existing contracts by the legal maximum and using breaks between contracts to hike their charges unfettered. Since 2007, Berlin rents have risen by 35 percent, markedly higher than the German national average rise of 15 percent. The result has been a string of evictions of longstanding residents from their communities, and many people are seeing the range of apartments in their price range shrinking.

There have been other, specifically local problems. Longstanding tenants, for example, have found themselves stuck when they want to move to a smaller apartment (perhaps when their children leave home). These people find that, thanks to landlords putting up rents in between contracts, smaller rentals available on the market cost more than what they already pay. These tenants then stay put, so larger apartments can't go to people who really need them. These complications have caused high levels of resentment in a nation unused to the vagaries of an intensely speculative property market.

Germany's new role as an international property honeypot is partly behind this boom. Ironically, the country's rental laws, which have so far stopped a property bubble forming, also make Germany very attractive to investors. While rises are steady, property prices are less volatile than elsewhere and thus something of a safer bet. So Germany's government has now come up with a set of new rules to make sure city dwellers don’t get priced out of their neighborhoods.

The key changes are these. In Germany's three largest cities – Berlin, Hamburg and Munich – landlords will not be able to charge more than 10 percent of the average rent for comparable housing in the area.  Instead of the usual 20 percent cap, rents must rise by no more than 15 percent in three years, with the rise-free first year kept in place.

Some smaller changes are also afoot. From now on, real estate agents' finder's fees must be paid by landlords, not tenants – previously they could cost renters up to around six weeks rent. And while landlords are currently allowed to add 11 percent of any renovation costs to their tenants' rental bill, now they will be allowed to add a very slightly smaller 10 percent. 

There are some also carrots for investors among the sticks. New apartments will be exempted from the new rent restrictions, and their developers will be allowed to offset more of their investment against tax. Outside Germany's big three cities, current laws will remain unchanged. This area includes prosperous major cities such as Cologne and Frankfurt. The idea may be to redirect property investors elsewhere to re-balance the national market a bit.

Crucially, the proposed measures are popular. German media criticism so far has focused on the new laws' limited geographical scope rather than their content. Introduced by the center-left Social Democratic Party, a new member of Germany’s ruling coalition, the changes have widespread support in a country where more people rent their homes than buy. Most Germans sink their savings into investments other than property, so the number of people with a vested interest in rent rises is smaller than in many countries. As tight rent control laws have not prevented the building of excellent new housing, there's still a tentative national consensus that housing is an essential public resource first, a speculative good second.

Top image: Drilling rigs stand on a construction site for luxury apartments behind a 0.8 mile section of the former Berlin Wall, also known as the East Side Gallery, in Berlin. (Thomas Peter/Reuters)

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