Up close, a case study featuring the law of unintended consequences

The law of unintended consequences is a well-known phenomenon in the social sciences, whereby purposeful and well-meaning action leads to outcomes that are not the ones intended. The evidence is mounting that the closer the Mietpreisbremse or ‘rental brake’ comes to being introduced in Germany as law, the more landlords are beginning to change their behaviour in a manner likely to exacerbate Germany’s housing problem, if that is what it is.

If the German public at large was only dimly aware of the pending legislation before, then the airing of the issue on one of Germany’s most popular talk-shows last Sunday night will have demystified much of the unclarity surrounding the proposed measures.

Among the talk-show guests were Olaf Scholz, the mayor of Hamburg and deputy chairman of the national SPD party, coalition partners of Angela Merkel, and Christian Lindner, chairman of the FDP Liberal Democrats. The other guests included a practicing real estate lawyer, a property manager and a housing sociologist. Three of the five, when asked, said they lived in their principal residence as tenants, not owners – a not untypical ratio for middleclass Germans.

Scholz, the leader of the ruling party in Hamburg, is a dyed-in-the-wool defender of the Mietpreisbremse. His party colleague in Berlin, the Minister for Justice and Consumer Protection Heiko Maas, is feverishly tabling the legislation that will free good Germans from the greedy property speculators that are hell-bent on enslaving them. The new laws, which each individual federal state may introduce through their own parliaments and for their own ‘overheating’ neighbourhoods, proscribe the raising of rents by landlords on new lease agreements by more than 10% of a recognised local rent table, or Mietspiegel.

FDP man Lindner was vociferous in defending the view that is widely shared by the German real estate industry. The real issue is how to provide incentives for sufficient new construction to meet the housing demand, rather than providing further disincentives for builders, he not unreasonably argued.

The audience was given an inkling of how complex and tortuous the new law has to be in its written form, to match and counter-match all the devious possibilities for circumventing its intent. The contortions, provisions and sub-clauses being built into the law (already weighing in at 40 pages, before the latest round of amendments) means that only ideologues, hopeless optimists or politicians with large constituencies of aggrieved voters can believe in its worthiness.

Out in the real world, landlords are already reacting in panic to the threat of the new law. ImmobilienScout24, the leading German online real estate portal, says that rents are now rising five times faster than they were in the months before the Berlin coalition agreement to introduce the Mietpreisbremse. Previously tolerant landlords are now scrutinising their rental agreements and enforcing the marginal annual rent increases they are permitted but previously never bothered with. Parking spaces, previously offered for a modest monthly fee, are now being rapidly revalued. Built-in kitchens, worth little or nothing to a departing tenant, are suddenly acquiring a value of several thousand for a landlord, as they are (importantly) not part of the rental agreement.

The list is endless – there are countless ways to ensure that the tenant willing to pay the demanded rent will get the apartment – without the landlord obviously breaking the rules. Anybody with half a mind can see this.

The perversity of the law is that it is designed to come into effect in precisely those neighbourhoods where demand exceeds supply – and where, by definition, it is most condemned to fail. If this were not enough, almost laughably, Minister Maas has actually calculated that the savings nationwide for tenants protected by his new law will be €854.2 million annually, while the burden on landlords will be €520bn, which presumably takes their extra investment in energy-saving improvements into consideration. This naivety is almost touching, if its side-effects were not so serious.

Our intention at REFIRE is not to mock political attempts to resolve what has become a pressing social issue in many neighbourhoods in Germany’s bigger cities. Germany does indeed stand at a crossroads in adapting to a world where housing is no longer just a social good - but nor is it purely a financial asset, to be traded, hedged and shorted like any other commodity. Sadly, attempts by the German state to interfere with housing market mechanisms have largely been botched, while superficially – and only temporarily - appealing to vocal minorities. That has been Germany’s recent history.

The state’s post-war involvement with housing has a chequered past. Earlier widescale provision of social affordable housing has been largely repealed due to the ghettoisation of neighbourhoods; the taxdriven incentives of the post-reunification era led to excessive house-building where nobody wanted to live, and the abolition of housing subsidies sent a mixed signal from the state as to where it stood on promoting housing ownership as an important support for old age pension provision. When housing needed to be built, over the last seven years or so, politicians held the issuing of building permits at post-war lows, and kept new construction unattractive for builders. The bill for all this screwing-up is now being presented. The government’s response is the Mietpreisbremse.

By muddling through over the last twenty years, the German state was able to successfully worm its way out of any meaningful role in housing. That’s the status quo today. Germany’s low interest rate regime – held artificially low by virtue of Germany’s dominant role in a currency zone with uncompetitive neighbours – is coming back to bite the country – or at least the housing market - in the neck. Now all these would- be Donald Trumps are rushing in to sanitise, refurbish, upgrade and gentrify so long as the getting is good, and interest rates are so low. As so often, the least advantaged are being hit the hardest – and are being illserved by this misguided legislation.