New Mietspiegel law to apply to all cities of 50,000 inhabitants and above

By Sara Seddon Kilbinger, Senior Reporter

Rent indices to become more widespread throughout Germany

Germany’s new Mietspiegel – or rent index – law came into effect at the beginning of this month in a bid to introduce sweeping rent controls throughout the country.

The rent index provides information on the local comparative rent for an apartment based on age, size, location and fittings. Landlords use the rent index to justify rent increases and to determine the correct rent level when issuing new contracts.

As of this month, municipalities of 50,000 inhabitants or above must provide mandatory information on rent levels and housing value characteristics. In the view of the German Tenants' Association, this aspect is "the most important achievement" of the reform. Anyone who fails to provide a complete and correct answer will face a fine of up to €5,000. The municipalities still have time to implement this. Cities that have not previously had a rent index have until 1 January 2023 to collate the data. If a municipality opts for a “qualified” rent index, the deadline is extended to 1 January 2024.

A distinction is made between a "simple" and a "qualified" rent index. Both rent indices must be comprehensible, as these instruments have an important indicative effect in the event of disputes in court. The qualified rent index in particular is intended to make it more difficult to challenge a rent index in court.

Chequered history of rent caps in Germany

Rising rents in Europe’s biggest rental market – 54% of people rent nationally, a figure which rises to 85% in Berlin - have become an ever pressing concern in recent years, although attempts to cap rents have often been unsuccessful, with renters and landlords finding ways to circumvent rental controls in popular locations where demand for apartments is high. According to the Gesellschaft für Immobilienwirtschaftliche Forschung (GIF), 124 of the 200 largest German cities had a rent index in 2021. In rent indexes, cities record the “cold rents” (excluding utility charges) per square meter agreed in new leases or after rent increases in the past six years, thereby creating the local comparative rent. Landlords are allowed to raise rents in existing leases up to this level. The prerequisite is that at least 15 months have passed since the previous increase and the rent is not allowed to be increased by more than 20% in three years.

However, some cities with a tight housing market have lowered this cap to 15% and the “traffic light” coalition would like to see it come down to 11%. Some ministers have voiced their opposition to such an index, with Construction Minister Klara Geywitz (SPD) saying that she was "no fan" of index-linked leases and that it would be examined whether these fulfilled their purpose without burdening the tenants "unfairly".

Some cities agree with her. In April, the Spandau District Court in Berlin ruled that Berlin's Mietspiegel was neither a qualified nor a simple rent index, and in effect had no validity in determining the level of comparable rent in the city on which large numbers of tenants depend for their protection. The judgment by the court means that Berlin no longer has a valid rent index for the first time since 1987. The court was compelled to rule following a dispute in which the landlord of a 39 square metre apartment in Spandau was trying to increase the rent in September 2021 by €35.70 per month, to €273.73. Professor Steffen Sebastian of the IREBS Institute at the University of Regensburg said the decision could have wide-ranging consequences for tenants and landlords. Large, well-organised landlords who submit three appropriate comparative rents would now be able to increase rents way beyond the existing rent index, whereas small private landlords would no longer have the option of availing of the rent index, since any rent would now be formally unfounded, so no tenant would be obliged to comply with it.

Biggest residential landlords already hiking rents

Predictably, some landlords are already hiking rents. Last month, Germany’s biggest residential landlord Vonovia said it will increase rents if high inflation continues, having already increased rents by around 3.1% on average in the first quarter of 2022. Vonovia’s CEO Rolf Buch has said that if inflation remains at 4%, rents will have to rise accordingly across its 565,000 apartment portfolio. Fellow landlord LEG, which holds a portfolio of around 160,000 apartments, has also signalled that it would increase rents again if the economic climate did not change, following average rent increases of 2.7% in the first quarter. Germany has been particularly badly hit in recent months by COVID-related supply chain problems and the war in Ukraine. Consumer prices rocketed by 8.7% in May, the highest level since 1974.

To limit rent increases in new leases, the German government introduced the so-called Mietpreisbremse, or rent brake, law in 2015 whereby landlords are allowed to charge a maximum of 10% more than the standard local comparative rent when changing tenants. Nonetheless, the rent brake does not apply everywhere. According to GIF, the rent brake applies in 65 of the biggest cities, including Munich, Stuttgart and Hamburg.