Three Fallacies Concerning the Rent Freeze

Published on 2014/01/07
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The other day, I shared my thoughts on the mechanisms of self-deception in the real estate industry with you, here in this same newsletter. Many property owners stubbornly refuse to accept the fact that rent freeze on lease renewals will definitely come – and that it will have serious ramifications for many landlords.

Fallacy no. 1: “Who can even say whether we will really see a rent freeze” – went one of the lines you kept hearing until recently. The argument was based on a variety of reasons. One of these “reasons,” suggesting the Social Democrat constituency would reject the plans for a Grand Coalition with the Christian Democrats, was refuted when the party members endorsed the coalition. But even if the Social Democrat members had voted “No,” what difference would it have made? The rent freeze for new leases is included in the programs of all parties represented in the Bundestag. It is also a campaign promise that will “cost nothing” – at least not from the perspective of the policymakers. I bet you anything that the rent freeze will be introduced (and would be more than happy to lose my bet, being a landlord, too).

Fallacy no. 2: “There is no way to tell what the rent freeze will look like.” Which is stating the obvious: No draft bill has been presented yet. Then again, the wording of the coalition agreement is quite specific: The rent freeze will apply to the re-letting of apartments, leaving the two options of either maintaining the rent level of the previous lease or exceeding the local reference rent by 10% maximum. And it will not apply everywhere in Germany, but only in places with a – perceived – housing shortage. This will also be the basic contents of the respective law yet to be passed. Naturally, many of the specifics will have to be sorted out yet, such as: How do you define a local reference rent in the absence of a rent table? How will rent tables be calculated in the future? Who will get to diagnose a housing shortage, and what diagnostic instruments will be used? What are the qualifying characteristics of a “comprehensive modernisation” that would justify a higher rent rate?

Fallacy no. 3: “There will be any number of ways to by pass the rent freeze in practice, so the practical consequences will be limited.” Not a day goes by without someone sharing another clever idea on how to outfox the rent freeze. The range of schemes extends from the separate letting of furnishings all the way to the forgery of heads-of-terms for the most recent lease which represents the upper limit for the rent quoted in the next lease. The thing is: This may work for small-time landlords here and there. For large housing companies, however, these are impractical approaches. What is more, the German Tenant Union will keep a close eye on any loopholes and brief the public through the media in order to put a stop to any bypassing attempts.

About the Author

Dr. Rainer Zitelmann is one of the leading experts for the strategic positioning and communications of companies.