Germany’s housing market
“The rent control law rarely works”

The German rent control law known as the “Mietpreisbremse” or literally the “rent brake” was designed to slow rising housing costs, but has not really solved the problem. In an interview, economic researcher Claus Michelsen talks about some other approaches that might rein in soaring rents.

By Hannes Koch

Affordable housing is becoming increasingly scarce in Germany’s downtowns. Low-income residents are hit particularly hard, and many are priced out and forced to move to the less desirable outskirts. So the German government drafted new legislation in 2015: the “Mietpreisbremse” or “rent brake” was intended to slow skyrocketing rents. Yet the problem persists some three years later. Economist and real estate market specialist at the German Institute for Economic Research (DIW) in Berlin Claus Michelsen explains why the rent control law is limited in its effectiveness and how the German government should proceed.  
 
Mr. Michelsen, Germany has been plagued by rising rents and a shortage of living space for years. Why is that?

On average, Germans spend more than a third of their income on housing, electricity, heating and other incidental expenses. This is really tough on people who don’t earn much. And unlike in Spain, France or Italy, the majority of Germans do not own any real estate. More than half of all Germans live in a rented flat.
 
In 2015, the German government passed the rent control law known as the “Mietpreisbremse”. It takes effect in areas with a housing shortage and stipulates that new rental contracts cannot go more than ten percent above the rents paid for comparable apartments in the surrounding area. The law is designed to prevent housing costs from rising too quickly. How has it been working?

In places where rents have risen by four percent or more in recent years, rent control has prevented another sharp upturn. This applies to Berlin inner-city districts like Kreuzberg and Neukölln and some areas in Munich, for example. Our calculations show that it has only had an effect in a few areas though.
 
So should rent controls be tighter?

It would be fairly simple to reduce the increase allowed for new rentals from ten to say seven percent of comparable rentals. But that would be a political decision the ruling coalition would have to make.

Why doesn’t the Bundestag simply decide to freeze rents for something like five years?

I suspect some politicians are not enthusiastic about going head to head with property owners, an influential interest group. A ban on rent increases would reduce their returns. Apart from that, the market economy needs functioning price signals. Rising real estate prices encourages investment and more housing gets built– which is what we want. It is always difficult to find the right balance between return and social compatibility.
 
The fact that not enough new apartments are being built is a major problem. How could the government create better incentives?

Building space in downtown areas is scarce and expensive, and not enough new building permits are being issued. One possible solution would be to condense urban residential areas, i.e. to add a sixth story to a five-story building, or to enclose small gaps between buildings. The state-owned KfW Bank would need to offer attractive loans to encourage builders.  
 
High rents are especially hard on the poor. Should the state have more publicly subsidised housing built?

Absolutely. Rents in residential buildings built with state subsidies are controlled for 20 years, for example. This market segment has been neglected since the early 2000s, but the federal government recently increased its spending on public housing again.
 
Germany levies a tax that property owners have to pay. It is calculated based on the value of the land and any buildings on it, which means taxes for developed land are higher. Would it be helpful if only the land itself were taxed?  

That might help, because it would make it more uneconomical to leave empty plots fallow. There would be more incentive to build on them.
 
Is immigration to Germany also responsible for rising housing costs?

Only in part. Triggered by the financial crisis, many people have moved to Germany from Spain, Portugal and other EU countries since 2007. The influx of refugees that started in 2015 has also had an effect. However, the main reason for the high housing costs in cities is due to high internal migration to urban areas from rural regions. Young, well-educated people are moving to the city looking for better education, jobs and cultural activities. Then there are the serious structural changes taking place in many rural regions. There used to be a factory in every small town in eastern Germany, for example, and a large agricultural cooperative operated in every village. Most of these jobs have disappeared, so life in the countryside no longer seems attractive to many.