Germany's 'rent brake' and the impact of rent controls

The Week in Housing 28/06/24

Today’s guest post is another piece by Cora Saxenberger, a research assistant at the School of Social Policy, Social Work and Social Justice (UCD), who has been working with me over the past several months. Cora recently wrote this great piece on Berlin’s campaign for the expropriation of institutional landlords. Today’s piece looks at Germany’s recent experience of rent regulation and what we can learn from it. This will be the last post before the summer break. The Week in Housing will be back in September. Among other things, I’ll be publishing plenty on cost rental in Ireland, as I’ll be publishing new empirical research on the sector’s impact on residents. Thanks to everyone who subscribed, read and engaged with my writing over the past academic year, and thanks to the guest contributors for some fantastic pieces.

Rent controls are a hotly debated topic amongst economists, politicians, and housing activists alike. With a host of countries re-introducing rent regulation over the last five years, and with Ireland’s Housing Commission recently calling for the reform of our RPZ system, it’s a great time to get a sense of what their impacts are. Germany’s recent ‘rent brake’ is instructive here. Implemented at a federal level in 2015, it is a temporary measure to limit the scope of rent increases for newly signed rental contracts to a maximum of 10% above the local reference rent (a representative cross-section of rents typically paid for comparable housing in the same locality), and applied to areas designated as experiencing tight housing market conditions. Ongoing leases were not affected and landlords were not forced to lower rents below the level established in the previous contract, even if it exceeded the 10% threshold above the reference rent. Although it started as a temporary measure, much like the RPZs it has been extended for over a decade. Nevertheless, policymakers continuously argue that it is only a temporary tool until the scarcity of housing, the source of the affordability crisis, can be addressed.

The effectiveness of the rent brake is widely debated but made difficult to assess due to a lack of nation-wide, specific, and conclusive data on parameters (such as past rent levels or renovation activities) which are essential for evaluating the efficacy of the rent brake. Additionally, there is a lack of recent studies, especially from 2020 onwards. The existing studies, many of them from 2016 – 2018, are however, because of the aforementioned lack of conclusive, nationwide data, often based on simulations, experiences from other countries, or possibly distorted models which leave out crucial other effects for rent price formation. Nevertheless, most studies come to similar conclusions, namely that while the rent brake is somewhat effective in reducing rent prices, it is questionable whether it created the meaningful social impact it was intended to have.

Most studies evaluating the effectiveness of the rent brake agree it is more effective than its reputation. It achieved a slight decrease in the growth of rent (with regional differences) and heightened awareness among landlords and tenants regarding the dynamics of rent pricing, while the feared negative effects on renovations, maintenance, and construction of new dwellings did not materialise (since the legislation included exemptions for these activities). Nevertheless, most studies agree that it is questionable if the socioeconomic goal of the rent brake, increasing accessibility for lower-income households, has been achieved, with a decrease of supply and increase in demand (and consequently competition) for rental properties in regulated segments, non-compliance of landlords, and rents in regulated segments still being too high for lower-income households to afford.

So what are the reasons for the limited effectiveness of the German rent brake? Critics argue that the effectiveness of the rent brake is hampered by several key factors.

Firstly, the policy's vague formulation and non-uniform implementation limits its basic functionality. Its implementation at the local or county level instead of nationally results in significant disparities between regions. While some counties have adopted stricter regulations, such as Bavaria extending the eviction waiting period for landlords seeking to sell existing rental properties from the federally mandated three years to ten, others, like Saarland or Saxony, have opted not to enforce the rent brake at all. This lack of uniformity diminishes the overall impact of the rent brake on a national scale. Additionally, the many exceptions to the price caps, such as those for furnished or newly constructed apartments or places with previously higher rent levels, undermine the effectiveness of the policy, allowing landlords to circumvent its intended constraints. Furthermore, even with the price caps, many rents still exceed what lower-income households can afford, suggesting that the rent caps themselves may not be ambitious enough to address the underlying affordability issues.

Secondly, landlords frequently do not comply with the rent brake regulations, employing various tactics to evade compliance (much like the Irish case). Many landlords advertise rental properties at prices that exceed the rent brake's maximum allowable rates, while others attempt to bypass the regulations entirely by offering ‘furnished’ rentals or carrying out renovation activities, which exempt their properties from the price caps. Moreover, there is a lack of uniform enforcement mechanisms or central oversight to ensure landlord compliance with the regulations and impose sanctions for non-compliance. Consequently, the burden of enforcing the rent brake regulations falls t most often on tenants, who may lack the knowledge, resources, or security to do so effectively. Many tenants are still unaware or unsure of the exact regulations in place and therefore unable to make use of the regulations. Additionally, tenants, who are desperate for accommodation, are often reluctant to fully use all of their legal options out of fear of the impact on their relationship with their landlord, on whom they are dependent.

By far the largest hinderance to the effectiveness of the German rent brake are fundamental flaws of the rent calculation system on which the rent brake is built: the rent mirror and local reference rent, which are criticised for their lack of reliability and timeliness. As mentioned before, the functionality of the rent brake is intricately tied to the local reference rents, the representative cross-section of rents typically paid for comparable housing (in terms of location, facilities, size, and state) in a specific area. Local reference rents of a municipality can be accessed and retrieved using the rent mirror of the municipality, an online tool that can be described as a collection of all local reference rents for properties of one municipality. While the rent mirrors are divided into simple rent mirrors and qualified rent mirrors, both are being criticised for different reasons.

The simple rent mirror, derived from stakeholders’ knowledge rather than robust data, often fails to accurately reflect actual market prices. Similarly, the qualified rent mirror, while theoretically based on robust data and updated every two years, suffers from data inaccuracies and a lack of transparency in its criteria for demarcation. As a result, the rent mirrors frequently lag behind market developments and do not show the most accurate and up-to-date data. Therefore, they become ineffective in guiding landlords to set rental prices in accordance with the rent brake regulations. Even if landlords are attempting to set their rent prices according to the rent mirrors, rent levels would still not be kept at a manageable level for tenants.

Finally, most scholars highlight two key points with regard to the effectiveness of the rent brake. First, there's a lack of nationwide data on things like modernisation activities, previous rent levels, and current rent levels, making it hard to accurately assess the rent brake's effectiveness. This relates to the wider issue of the importance of robust data collection and enforcement to evaluate and ensure compliance with rent regulations. Second, regardless of their stance on the rent brake, most studies agree that combatting housing shortages and inequality in the private rental sector requires a mix of strategies and instruments. This includes creating more incentives for building new housing and maintaining the quality of existing ones, as well as improving the mechanisms of the local reference rent and the rent brake.#

Events & news

A reminder that Michelle Norris is giving the next #SimonTalks webinar (July 1st, 10am), looking at the Housing Commission recommendations on social housing reform.

What I’m reading

A new paper (very empirically rich) on wealth inequality and inheritance in Ireland, and the latest iteration of Threshold’s tenant sentiment survey.