Rental Index Legislation – Will the Christian Democrats Fold again?

Published on 2015/02/17

The rent control law for the so-called “rent freeze” has been enacted and will enter into force in May or June. Not missing a beat, the Federal Ministry of Justice has gone right back to work in order to draft the second bill in this context, the rental index legislation also written into the coalition agreement. The latter states: “We will see to it that the local reference rent is put on a broader basis and presented in more realistic form in the rental index.”

So far, the local reference rent is derived, pursuant to Art. 558, Sec. 2, German Civil Code, from the “normal consideration that has been agreed in the same community or in comparable communities for residential accommodation of comparable type, size, features, condition and location during the past four years.” This is about to change.

What is at issue? The local reference rent, which did not use to play a role in the re-letting of apartments, will become the main basis of assessment in the future. This makes it sensible to regulate two things:

  1. The mandatory compilation of a rental index for every place that will be subject to a rent freeze.
  2. A law with binding regulations for the methods used to compile a rental index.

The second point is subject to extreme differences in opinion. A week ago, at a panel event hosted by BERLINER IMMOBILIENRUNDE, the President of the DMB German Tenant Union, Dr. Rips, stated in this context: If it was up to him, he would include not just the leases of the past four years, but all leases (including the ones signed 20 years ago, for instance). Since even he had to admit that this would never find a majority, he favours an approach that includes the past five to ten years in the rental index. The aforementioned Article 558, Sec. 2, German Civil Code, would have to be revised accordingly.

As usual, the demands of the tenant union are backed by the Social Democrats. But what about the Christian Democrat bloc? So far, the Christian Democrats have rejected the idea: “Count us out,” was the response to the planned “4 + x” arrangement, at least until recently. The housing-policy spokesman of the Christian Democrats, Dr. Jan-Marco Luczak, was quite right in calling the rent freeze legis

lation a “blank cheque” at the BERLINER IMMOBILIENRUNDE panel, because the method to be used to compile a rental index has yet to be defined, ex post facto, in a second piece of legislation that will govern the rental indices.

However, there are several reasons to believe that the Christian Democrats will fold again and adopt the Social Democrats’ position: In my role as host of the panel, I asked Dr. Luczak of the Christian Democrats no less than four times whether the “4 + x” arrangement remains out of the question for his party. Four times, Luczak beat about the bush in a charming flourish of rhetoric. Yes, he didn’t consider “4 + x” a sensible idea, and yet, and yet … He was in no way willing to uphold the position that the Christian Democrats would refuse to adopt the “4 + x” arrangement demanded by tenant union and Social Democrats. And since Luczak counts among the more reasonable policymakers in the Christian Democrat bloc, my concern is this: The Christian Democrats are already making up their minds to align with the Social Democrats. Perhaps the number of years considered will be 7 rather than 10 – and the Christian Democrats will sell it as the successful outcome of a heroic struggle.

Which way forward now? The assumption used to be that the Grand Coalition would not get the new rental index legislation on the road before the end of this parliamentary term. But the momentum has picked up lately. As the attendees of the BERLINER IMMOBILIENRUNDE panel learned, preparations are well under way. As soon as the rent freeze was in place (meaning the “blank cheque”), work on the second bill would proceed. The Federal Ministry of Justice confirmed upon inquiry that a second legal bill to address the rental index issue is in preparation.

Explosives are often detonated by keeping two substances that together would form an explosive mixture separated by a barrier, which when removed will create a big bang. The rent freeze and the rental index legislation strike me as the two components of such an explosive mixture: Taken together, they will not just slow rental growth but generate a momentum that will actually reverse it over time. Because if the rates of leases signed ten years ago will factor in the calculation of local reference rents in the future, it is only plausible that the local reference rent, which is the key benchmark for the rent freeze, will decline.

Theoretically, a rental index ought to reflect the reality of the current letting market. As it is, the existing model of rental indices has failed to deliver an accurate picture. But instead of fixing the shortcomings, and it would have been high time to do so, the warped approach is elevated into the guiding principle.

The rent freeze can no longer be stopped. But the interest groups of the real estate industry and all property owners should mount the barricades and put pressure on the Christian Democrats to keep them from caving in again, this time in the rental index issue. The “4 + x” approach should by all means be prevented.

Here is another thing: Aside from the rental index legislation, the current regulation governing the amount eligible for modernisation allocations is also about to be revised. The going rate is 11%, as everyone knows. The plan was originally to lower it to 10% and to simultaneously let the allocation arrangement expire with the amortisation period. Since this would be impossible to implement, the tenant union is now demanding that the allocation be lowered to 6-7%, which would severely degrade the cost effectiveness of modernisations. I’ll bet you anything that the Social Democrats will rally behind the tenant union.

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