Mietpreisbremse ‘unlikely to survive new German government in its present form’

Germany’s much-maligned Mietpreisbremse, or rental price brake law, is unlikely to survive Germany’s still to be determined new coalition government in its present form, real estate experts have told REFIRE, in light of the tumultuous federal election on Sunday.

Last week, Berlin’s district court ruled that the rent control law violates the constitution, citing paragraphs 556d and 556e of the German Civil Code. The judges complained that landlords are not treated equally across the country because the local benchmarks used to calculate rent increases vary massively in different areas. In addition, the rent brake law does not apply to rentals that were more than 10% above the local benchmarks when the new law was introduced in June 2015, which enabled those landlords to continue charging higher rents, according to the Skjerven Group.

‘Jamaica’ coalition on the cards

What happens next depends largely on the coalition that Angela Merkel’s CDU party forms following a disappointing election night on 24 September. The CDU secured 33% of the vote, which put them in the lead, even though it represented a loss of 8% compared to the last election and CDU’s worst result since 1945. It was also a disastrous night for Martin Schulz’s Social Democrats (SPD), which took just 21% of the vote, the poorest vote for Germany’s oldest party since 1949.

Schulz has vehemently ruled out playing a part in a coalition government, saying that SPD intends to sit out the next four years in opposition. It was a great night for Germany’s Free Democratic Party (FDP), which gained almost 5% to take 10.7% of the vote.  More worryingly, it was a strong night for Germany’s far-right Alternative für Deutschland (AfD), which won 12.6% of the vote, making it Germany’s third largest party and propelling it into the Bundestag, where it is expected to occupy 88 seats, compared with 217 for the CDU/CSU and 137 for the SPD.

Given that Schulz has ruled out a CDU/CSU/SPD Grand Coalition (GroKo), the most likely outcome is a ‘Jamaica alliance’, so called because the parties’ colours make up the Jamaican flag, between the CDU/CSU, the FDP and the Greens, which would have 356 seats.

‘If we get a ‘Jamaica’ coalition, I think they will tweak the Mietpreisbremse from an ecological standpoint but less so from a social justice one,’ said Dr. Konstantin Kortmann, head of residential investment Germany at JLL.

‘If we were to get a CDU/FDP coalition, which is rather improbable, the Mietpreisbremse will be abolished, because they have decided to do so in North Rhine-Westphalia already,’ he added.

Those in the German property industry are now hoping that Merkel will be true to her word and reject a tightening of the rent brake. In a first reaction to the Bundestag election, Jürgen Michael Schick, president of German real estate association, IVD, said: ‘A few days ago, the Chancellor strictly rejected a tightening of the rent brake. She also wants to work to improve the conditions for new construction. We will hold her to her word.’

Is the Mietpreisbremse on the way out?

The verdict by Berlin’s district court last week spells good news for residential landlords, many of whom felt hobbled by the rental caps and may be a welcome sign that the Mietpreisbremse is on its way out.

‘We have taken note of the verdict and are pursuing the further development with great interest,’ a spokesman for German residential landlord Deutsche Wohnen told REFIRE. ‘Ultimately, we are not convinced by the rental brake, as is the case with many others. To reach a moderate rent development, which was the aim of the rental brake, it is much more important to invest in new construction.’

While he conceded that the rental brake has affected business, it has not happened ‘as much as one might expect’. ‘We invest in metropolitan regions and growing cities, therefore the development value of our holdings has at least the same importance for us as the rental development,’ he added.

Other landlords hold a similar view: 'I'm not a fan of the Mietpreisbremse because it doesn't help the people who really need help,’ said Friedemann Weck, head of acquisitions at ADO Properties. ‘A landlord will always take a wealthier tenant over a lower-paid one, such as a nurse or a taxi driver and there is nothing in place to change that. The rent cap is not working, it’s achieving the opposite. Politicians need to understand that they can’t temper with or interfere with market forces.’

Others have also been quick to applaud Berlin’s district court verdict. ‘From our perspective, this is indeed a strong signal for a change in national housing market regulation,’ said Andreas Schulten, a board member and media spokeman at consultancy BulwienGesa. Property associations such as ZIA and Haus & Grund have also welcomed the ruling. Haus & Grund has criticized the Mietpreisbremse, saying that it creates uncertainty between tenants and landlords. The IVD is also a long-term advocate of abolishing the price brake law.

Many in the industry, including ZIA’s president, Andreas Mattner, have complained that the Mietpreisbremse does nothing to promote the construction of new housing which is so badly needed in major cities.

When it was introduced in 2015, the Mietpreisbremse was designed to put a rental cap on residential rents. Under the terms of the law, Germany’s federal states could impose rental caps on residential markets, freezing them at 10% above an agreed ‘rent table’, or Mietspiegel, or an acceptable average price for a neighbourhood. The aim was, as the name suggests, to put the brakes on rents spiraling out of control in popular cities and to protect tenants who were in danger of being priced out of their neighbourhoods.

However, in practice, little changed. One broker told REFIRE that such is the demand for good quality housing in some districts of Berlin that tenants are willing to turn a blind eye to unlawful rent hikes, even paying a premium if it means they can beat off stiff competition for an apartment in a sought-after area.

There were also some exceptions to the law in a bid to encourage badly-needed new homes in populous cities. Subsequently, the rental cap has not applies to either new buildings or to first-time rentals which have undergone sizeable refurbishments, which is defined as a capex injection of about a third of the price of a new apartment.

Lack of adequate housing is an issue that the new coalition will also have to address. ‘In the past four years, the grand coalition tackled housing shortages with various regulatory measures,’ said Jacopo Mingazzini, managing director of Accentro Real Estate: ‘They have, of course, caused nothing but upset for the residential sector. The only thing that will help solve housing shortages is new supply.’

Still, many in the industry will be wondering what will happen to the Mietpreisbremse going forward. Some federal states, including North Rhine-Westphalia, are already planning to abolish the Mietpreisbremse, according to Kortmann. Schleswig-Holstein’s CDU/CSU/FDP/Green government also said in their coalition agreement that they would abolish the law. Now it is conceivable that other federal states could follow suit.

One thing seems certain: the Mietpreisbremse is due a radical overhaul. The Federal Constitutional Court will likely have to address the issue in the future but, in the meantime, the Mietpreisbremse’s next incarnation is still anyone’s guess.