Prolonging the rental price cap fails to address the underlying issue.
Housing is a sensitive issue that triggers social disputes: everyone requires a habitable space, regardless of whether they are tenants or homeowners. Thus, housing should remain affordable for all. However, this concept seems to be slipping lately. Over the past few years, homebuyers have complained about exorbitant property prices due to the recent real estate surge. Land and construction costs spiked, and high-interest rates on loans didn't help either. Even high-earners have difficulty buying a house or apartment, according to real estate analysts. Soon, renting might also become an issue.
Due to the increasing number of people unable to buy properties, they continue as tenants, further straining a shrinking market. This is occurring due to influx into major cities, the rise in solo and couple living situations, and the scarcity of essential new construction. Although purchase prices have stopped rising, rents are experiencing substantial increases in numerous locations. Between 2020 and 2024, they increased by 8 percent, as per statistics from the Federal Statistical Office. Compared to 2015, many tenants now pay approximately 30 percent more on average. In major urban areas, the price surge is even higher.
However, wages have not risen during this phase. After inflation adjustments, Germans' average income today resembles that of eight years ago. Meanwhile, rents, electricity, and gas have become more expensive, adding around 50 percent to housing-related expenses. Food prices have escalated near to 20 percent. Nominal incomes have only increased by 21 percent, significantly less than the total cost of housing. It's no surprise that the proportion of income spent on rent has been continually climbing, as reported by economic research institutes.
Many tenants are already struggling
On average, German households spend around 28 percent of their net income on net cold rent and maintenance costs, excluding electricity and heating. Around three million households spend over 40 percent of their net income, putting them under severe financial strain – which amounts to 16 percent of tenant households. Among single-person households, one in four surpasses the critical threshold, and among single parents, it's one in three. Among low-income earners, nearly half cannot afford the rent, as it consumes more than 40 percent of their income.
Restricting further rent increases might appear to be an intelligent strategy. The federal government is reportedly planning to extend the rent cap till 2028. This regulation permits rents for new tenancies to be a maximum of 10 percent above the local average, and there is a cap of 15 percent every three years for existing tenants. However, this is not effective.
Why? Firstly, incomes do not increase by five percent each year, and even the cap can overwhelm tenants if a landlord maximizes the increase every three years. Secondly, the rent cap, while well-meaning, does not positively impact the market.
The primary reason: The restriction does not impact new buildings or furnished apartments. Prior to 2015, when the rent cap was introduced, around 3.5 percent of the advertised apartments in major cities were rented furnished. Now, it's approximately 20 percent, in high-price cities like Munich and Stuttgart, where almost every third apartment is rented furnished, states the Federal Institute for Building, Urban Affairs, and Spatial Research (BBSR). Typically, furnished means that the owner has installed a bed, a sofa, and a dining table in the apartment. And for these furnished apartments, landlords charge an average of 38 percent more than others.
Providers also capitalize on the fact that prices for new apartments are effectively limitless to compensate for the current high construction costs.
Lastly, there's always someone who bears the brunt. Since many newcomers to major cities are highly paid specialists hired by tech companies, economic consultancies, law firms, financial service providers, or industrial corporations, their companies frequently contribute to their rent or pay higher salaries to ensure their employees can still afford decent housing in high-rent locations. This ultimately inflates prices and the rent index.
Rents increase in new buildings and existing properties
Therefore, despite the rent cap – which only applies to new contracts – existing rents are also surging strongly. Because every new rental and rent increase in recent years has contributed to the local rent index. Current long-term rents do not. This means that even long-term residents can now have their rents significantly increased. Because the inflated new rents have raised the levels dramatically.
Additionally, the energy-efficient modernization requirement means that increasingly affordable apartments are undergoing expensive renovations – and then re-emerge onto the rental market at higher prices. The rent cap does not apply to extensive modernizations. Although energy conservation is generally beneficial and in the interest of residents, it does not contribute to limiting overall housing expenses due to such regulations.
New construction is more effective than rent cap
The only factor that could genuinely control rents in the disputed major cities is new construction. However, investors are not championing this right now because the costs have become excessively uncertain for them. Cities have been creating minimal new building land for years due to the resistance of citizens' movements, transportation congestion concerns, or the lack of staff to process building applications more quickly. And since many municipalities sell building land at the highest price, new construction only makes financial sense if luxury projects are constructed on that land.
As long as there aren't enough new living spaces being built, yet there's a higher demand for them, the rent cap can only be described as: an ineffective regulation. This is because the market responds to supply and demand, not artificially set price limits.
This cap is essentially politicians' desperate attempt to tackle a significant social issue in our country. However, the real solution should be: to eliminate the numerous barriers that have currently halted housing construction. This includes getting rid of excessive regulations to simplify and reduce the cost of building. Dedicate new land for construction, allowing for more living spaces to be created. Lastly, financially incentivize the construction of rental properties more substantially. Only an increase in supply can lead to decreasing prices.
This piece was initially published on Capital.de (Paraphrased)
Many tenants are already struggling due to the rising costs of housing, as they spend a significant portion of their income on rent and maintenance. With the average German household spending 28% of their net income on these expenses, and around three million households spending over 40%, the rent cap extension till 2028 may not be enough to alleviate their financial strain. In fact, new construction is more effective in controlling rents than the rent cap, as the market responds to supply and demand, not artificially set price limits. Therefore, eliminating barriers to housing construction, such as excessive regulations, dedicating new land for construction, and financially incentivizing rental property construction, could lead to an increase in supply and decreasing prices.
