German government passes reform of Rental Price Index law

The German government has passed an act for the reform of the rental price index system in Germany, which is currently one of the options provided by law for the determination of the “local comparable rent” for use in conjunction with rental increases and new lettings in the privately financed residential sector in accordance with § 558 BGB (German Civil Code). 

The index is a list of standard rents for different types of non-price controlled rented housing based on type, size, fit-out, quality and energy efficiency and serves as a means to control rental price increases. 

In principle, at the point of statutory rent review the landlord may only increase the rent up to the level shown in the rental price index, which offers some protection to tenants in a predominantly rental market. In times of rapidly increasing rents, this serves to limit excessive rental price increases. 

In areas within the jurisdiction of a rental price brake, the index can also be used to set the rent for new lettings. The index is compiled by local authorities in co-operation with relevant interest groups such as landlords' and tenants' associations. So far there has been no obligation on authorities to draw up an index, and many have chosen not to do so.

The reform now passed by both houses of parliament is intended to make the rental price index more informative and to encourage local authorities to produce a “qualified index”. The creation of a rental price index is now obligatory on towns and cities with populations of over 50,000, and any community which does not currently operate an index must produce either a “simple index” by 01.01.2023 or a “qualified index” by 01.01.2024. In future, both landlords and tenants will be obliged to provide information on rental prices and descriptions of rented properties. 

A simple index is an overview of the typical rents in a community or comparable community prepared and/or recognised by both the authority and representatives of the interests of landlords and tenants (§ 558c BGB) which is recompiled every two years. A qualified index is drawn up every two years according to recognised scientific principles and recognised by the authority and the above interest groups. In exceptional cases it may be adjusted according to CPI after two years before being recompiled after four years. 

The new reform is intended to reduce the likelihood of disputes and to encourage local authorities to compile qualified indices, which carry greater weight in a court of law. 

There are varying opinions on the index as a political tool. As references to local comparable rents become more of a topic and rental price indices are used increasingly in legal proceedings, there is some discussion whether they are really compiled on the basis of sufficiently robust empirical principles.

There is, naturally enough, criticism from the various interest groups, broadly split into those representing landlords and tenants:

On the landlord side, there is criticism from owners’ groups that the rental price index is an instrument of political control and essentially a rental price cap: Axel Gedaschko, President of the housing industry organisation GdW is concerned that the lengthy period between reviews and the increase of the review period, which was increased from four to six years on 01.01.2020, mean that the indices do not sufficiently reflect market conditions and subdue the effect of current market rental price increases. 

Jürgen Michael Schick, President of the IVD (German Real Estate Association), also warned against reliance on rental price indices, which should really be used to reflect rents, but not control them.

Tenant organisations have their own concerns: Lukas Siebenkotten, President of the DMB (German Tenants' Association) and Melanie Weber-Moritz, DMB Director, are of the opinion that all rents including price-controlled rents should be included in the determination of the local comparable rent in order to present a fuller picture. 

They supported the index obligation to be introduced in all larger towns and cities and those communities subject to a rental price brake and welcomed the increase in the period of validity, as this would tend to keep the rents at a lower level for longer.

Prof. Steffen Sebastian of IREBS supports the instruction of independent experts to compile the indices. He says there is still need for substantial improvements in the reform, for example independent calculations of the figures used for the index and verification of the professional expertise of those involved. He also welcomes the obligation on market participants to provide information, which he regards as a quantum leap.