Absurd: a Rent Freeze to Combat Stagnating Rents

Published on 2014/11/25

Even I was caught off guard by the latest figures: Rents on new leases have increased by a mere 0.84% year on year in Munich, by 0% in Frankfurt am Main, by 0% in Düsseldorf, by 0% in Dresden, by 0% in Bonn, and by 0% in Wiesbaden. I’ll bet you, though, that policymaker will want to introduce the rent freeze in these very cities anyway.

Naturally, there are also cities where rents kept pushing up, especially Berlin with a year-on-year rental growth of 5.67%. That said, the growth rate in Berlin is unsurprising insofar as rents here started on a particularly low level. They rose from 7.05 to 7.45 euros, compared to an increase from 11.90 to 12.00 euros in Munich.

But the broad-based rental growth trend has been checked.

We are looking at a phase where pent-up demand is being met, because rent rates in Germany have risen noticeably slower than

the inflation rate over the past 20 years. If you take 1994 as reference year, the inflation index score would be 134.6 today. The rent growth index for Germany, by contrast, would have risen by only 106 during the same period. Even in the top ten cities, the IVD Residential Price Monitor shows an index score of only 117.6 today. It was perfectly plausible for rents to experience an accelerated growth cycle at some point.

The prior years of stagnating rents or indeed rental decline seem to have escaped public awareness. There was quite a commotion, though, when rent rates did start going up again, and did so at a good clip. It has now led to the introduction of the so-called rent freeze at a time where rental growth is slowing or flatlining already. An absurd situation! But I’m under no illusion: Ideologically deluded politicians among the Social Democrats, Greens, and Left Party will never get sidetracked by facts and figures. Whenever reality is at odds with their ideology, they shrug it off, saying: That’s just too bad for reality!

Last week, I talked to several Christian Democrats. They had not liked the idea of having to vote for the rent freeze to begin with. In the time since the coalition agreement was signed with the Social Democrats, many Christian Democrats have come to consider it implausible to pass rent control legislation before the key term of such a bill has been properly defined.

The coalition agreement states that the representative list of rents should be put on a broader basis. This would necessitate a law governing the compilation of such a list of rents. For so far, the process has been nothing less than chaotic: Each city employs a different method to compile its representative list of rents. In fact, the methods are often so ramshackle that any first-year student of statistics would be able to identify their flaws.

Yet policymakers have reversed the logical sequence: Instead of passing legislation that clearly defines the methods for determining the representative list of rents, they started by building a law around a term that has yet to be defined – the “local reference rent.” Unsurprisingly, the explanatory memorandum to the bill actually concedes that there is reason to expect a high number of law suites because of this lack of clarity.

Unperturbed, the Social Democrats are already scheming: They intend to pass another law back-to-back with the rent control bill which would stipulate that the compilation of representative lists of rents be based on the past ten (!) rather than the past four years. If this came to pass, it would spell certain doom for residential property owners, and would certainly lay the axe to any future investment in this segment. For it would legally prescribe rent cuts. Conversely, it would be a dream come true for the lobbyists of the DMB German Tenant Union and socialists across all parties.

We should do everything we can to prevent this. I hope that those Christian Democrats will carry the day who insist on a proper regulation of the representative list of rents in a first step before rent control legislation is passed in the next.

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