The Cat is Out of the Bag: Even the Christian Democrats Call for Rent Control Now

Published on 2013/06/11

Remember? Four years back, the coalition agreement between Christian Democrats and Liberals had many kind and flattering things to say about the real estate economy, and many industry stakeholders were jumping up and down with joy. At interest group conventions, they were proud to pose with Christian Democrat politicians, who in turn chose strong words to make a case for real property and the property market, and earned much applause for doing so.

And then what happened? Well, nothing at all happened, except for a ludicrous ban on rent reductions during the first three months of energy refurbishments. The most recent measure was to pave the legislative way for another reduction of the rent ceilings. And here is how the parliamentary term appears to end: with a clear commitment by Merkel, Kauder, and Ramsauer – the key Christian Democrat figures in this context – to introduce rent control for new leases of apartments being re-let. It is an idea they copied, like so many other ideas, from the Social Democrats, their biggest rival.

On 31 May, the HANDELSBLATT reported wrote: “Merkel also plans to take steps against rental growth. Deviating from the existing policy of using incentives to create new housing, she promised a rent cap for new rentals. The election manifesto will state ‘that landlords may raise the rent only within limits when signing new leases’, said Merkel.” Volker Kauder, head of the Christian Democrat faction, similarly told the SCHWÄBISCHE ZEITUNG on 31 May that he is in favour of introducing “a rent cap for new leases of existing units,” and of adding this demand to the election manifesto of the Christian Democrats. The FRANKFURTER ALLGEMEINE ZEITUNG wrote on 01 June: “On Friday, the Bavarian Christian Democrats failed to oppose Merkel’s announcement. Admittedly, Federal Minister of Building Peter Ramsauer authorised the quote: ‘A rent cap should not be structured in a way that would choke construction.’ But the quote continued to say, however, that the party could well imagine a model that will not hamper housing construction.”

Naturally, this is no more than a trick, and is moreover the same trick as that played by the Social Democrats, by the way. Since even the Social Democrats realised that their original idea of generally, comprehensively limiting the rent on new leases to a maximum of 10% of the local reference rent would result in an immediate cessation of housing construction, both Social Democrats and Christian Democrats have now modified their idea of a “rent cap.” The rent ceiling on new leases is supposed to apply “only” to existing apartments, not new ones. For just how naive and myopic do these parties take the industry? While wishing to encourage housing construction, they plan to freeze rents for all time as soon as new apartments have turned into existing stock. The politicians behind this scheme appear to have forgotten that real estate investors tend to think long-term.

Is anyone surprised that the Christian Democrats have now adopted the Social Democrats’ demand? I, for one, am not. Indeed, I predicted more than once – including in one of the back issues of this newsletter – that a future grand-coalition government of these two parties will introduce a rent cap on new leases.

Angela Merkel must feel that it is thoroughly clever thing to do to snatch out all the key issues from underneath the Social Democrat, Green and Leftist platforms by appropriating them. The nuclear energy phase-out, an idea originally championed by the Greens, was realised on Angela Merkel’s watch. The minimum wage, originally an idea tabled by the leftist “Die Linke” and later by the Social Democrats, will now feature in the election manifesto of the Christian Democrats.

If you have no principles of your own and subordinate everything else to your bid for power, you will have no qualms about making the life of your political foes harder by simply copying their policies and demands. Sad to say, the CDU has long turned into another social-democrat party. Although you will still find upright economic liberals and conservatives among its ranks and files, these have become a less-than-influential minority within their party – and in society as a whole.

Just what the cap on new leases is to look like remains unclear. As is well known, the Social Democrats have demanded that rents on new leases may not exceed the local reference rent by more than 10% above the local reference rent. Yet here is what it says in the Social Democrats’ whitepaper “Alliance for Modern Cities and Affordable Housing”: “Exempt from this provision will be first-time lettings, because we do want more housing to be constructed…” Yet what good does it do if you get to freely negotiate rents with your first tenant only to become subject to the rent cap with the second tenant (that is, as soon as the first tenant moves out)? And what, pray, does it mean if Mr Kauder of the Christian Democrats argues the rent cap is to be applied only to “new lettings of existing stock”? Any new stock will become legacy stock at some point.

In short, it remains quite unclear what exactly Germany’s political parties have in mind. And we will not know for sure until a draft bill is on the table. However, I strongly caution my readers not to downplay the issue as mere campaign rhetoric that is unlikely to be turned into actual policy measures after the elections. I stick to my prediction: The next coalition government, no matter what the constellation (excepting the now unlikely continuation of the incumbent coalition of Christian Democrats and Liberals), will be sure to limit rent increase options in some way, including for new leases.

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