Why Germany’s rent brake has failed

By M.S.

WHEN Germany’s then minister of justice, Heiko Maas, introduced a “rent brake” in 2015, many applauded. Impoverished renters in London stared enviously eastwards. The brake was supposed to cap the price of new leases in markets with a tight supply of rental property (as defined by the relevant federal state) at 10% above what local authorities considered reasonable. But three years later, instead of stopping, or at least slowing, the rise in rents, the brake seems to have accelerated the process. Between 2015 and 2017, rents in central Berlin shot up by almost 10%. Before the introduction of the rent brake they had been rising by just 1-2% each year. Why has the brake malfunctioned?

Just 52% of Germans own their own homes, the lowest rate in the European Union, so rents are a big political issue. At a time when housing was becoming increasingly unaffordable across European capitals, Germany’s two major parties, the SPD and the CDU, teamed up to put together a plan to keep housing economical. The rent brake was introduced in popular parts of cities like Berlin, Munich and Hamburg. The main fear was that landlords would respond to the cap by refusing to spend money on their properties. But rather than delighting voters, the brake has disappointed.

The failure is due in part to the brake’s many shortcomings. Landlords have circumvented it far too easily. There are loopholes for newly renovated properties, for properties that were first let after October 2014, and for properties that were being rented out for more than 110% of the customary price before the brake was introduced. Also, no sanctions are placed on landlords who ignore it, other than a requirement to reduce the rent. The brake’s fatal flaw, however, is the demand it makes of renters themselves. Landlords are not obliged to disclose a property’s previous rental price; rather, the renters must ask for it before agreeing a new price and signing a contract. In practice, this means that many renters wary of jeopardising their chances of striking a deal end up keeping mum. And a landlord can then add a few euros to the price above that permitted by the brake.

When the CDU and SPD formed a new government in March this year, they put a toughening of the rent-brake law in their coalition agreement. Parliament is considering a bill that proposes sanctions for landlords, greater transparency and easier ways for renters to call out non-complying landlords. Other countries where rents are rising will follow the debate closely. (Last year Jeremy Corbyn, Britain’s opposition leader, announced his own plans to introduce rent controls.) The German government might look to France for ideas, but also for warnings. Rent rises in central Paris were capped by the local authorities to such good effect that prices soared in nearby non-capped areas. The city’s administrative court ended up scrapping the cap in the centre of town late last year on the grounds that it should apply to the suburbs as well. The German government may end up abandoning the idea of rent controls altogether, if it decides there is no feasible way to mend the brake. And if even the Germans are unable to make such caps work, Mr Corbyn might need to have a rethink.