Property Prices Caps Won't Prevent Rising Rents

The German government must get a clear handle on the rules governing rental prices in Germany, otherwise they can be overthrown in court, says our author.
Renting isn't easy today, is it?

The German government's new law on rent caps is, from one point of view, a promise to control the rising rent prices for its citizens, but looked at from another angle, this law seems to be built on a very shaky foundation. There is an inherent flaw in its construction that threatens to affect the 50 million renters in Germany. 

Because no one actually knows how high the rents should be.

One district court judge toppled the rent index for the capital for 2013, i.e. the figure that provides a guide for average costs in a neighborhood, acts as a compass for both renters and landlords, and which, up until now, settled fights and prevented lawsuits.

It's a figure that will also form the foundation of the new rent price caps in large cities. Because it is the justification for the rents of the future: should an apartment become available, it can't exceed the rent index by more than 10 percent in the future, according to the law by Justice Minister Heiko Maas.

Even with all the discussion about the rent price index, the law alone will not be able to stop the rent craze in the big cities.

However what if the rent index can be fought with a 20-page statistics report?

For landlords, going to court to fight against the rent index, as happened in Berlin, is one way to defend their interests. 

Even if the Berlin verdict is not yet legally binding, it reveals a grave planning error behind the new law: no one has defined the criteria for calculating the index to make it legally robust. The government must make up for that. 

The rent index has a long history in Germany. After the war, apartments were tight, and rent prices exploded in the 196os. Finally, the government enacted a special law to protect renters against being evicted because landlords put their rent up unreasonably.  

From then on, rent increases were supposed to be based on the “comparable customary rents in a place.” And yet the vague term caused problems for judges, who complained that ruling on this issue was an “unsolvable task.” And so the rent index was invented in 1974: renters and landlord representatives, from that point on, were meant to agree together on an appropriate local rent by area. 

Today, there are around 500 such “simple rent indices” in German cities. Some jokingly refer to it as the “red wine index,” because the local renters' association would meet in the pizzeria over a glass of red wine with the local landowners to discuss what might be appropriate.

As long as there are no severe housing shortage and just occasional disputes, this works just fine. But in big cities, a simple rent index was no longer enough in court. And so, in 2001, the coalition government of Social Democrats and Greens introduced the “qualified rent index.” Unlike the simple rent index, this had to be based on empirical data and be updated every two years – it could only take the rent prices of the last four years into consideration, and was automatically valid as evidence in court.

The problem is that a definition of “qualified” has not been formalized by politicians. The 2001 law only talks of “recognized scientific criteria.” 

The German government must now define what these criteria are as quickly as possible and codify them in a law.

But even with all the discussion about the rent price index, the law alone will not be able to stop the rent craze in big cities. This market failure is caused by a the lack of supply. Promoting the construction of residential housing is at least equally as important as fixing the unclear law.

 

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