The Consequences of the Berlin Rent Cap Ruling

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Julia Ptock

Apr 16, 2021
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Berlin, 16. April 2021 --- The decision of the Second Senate of the Federal Constitutional Court on April 15, 2021, ruled that the Law on Rent Restrictions in the Housing Sector in Berlin (MietenWoG Bln) is not compatible with the Basic Law. Or to put it another way: The law violates the Basic Law. The state of Berlin is not allowed to limit rent levels in the city with its own law. The legislative power lies with the federal government.

But what exactly does that mean now for tenants and landlords? Chris, Hypofriend CFO and Co-Founder, puts the court's decision in context for us and explains what it means for tenants, landlords and the housing market in Berlin. But first, a quick review. 

Why was the Berlin rent cap introduced?

Rents have been rising in Berlin for years. If tenants had to pay an average of 6.65 euros per square meter at the beginning of 2012, by the end of 2018 things were already looking very different. In just a few years, the price per square meter increased by over 50 percent to 10.21 euros. For many Berliners, moving was no longer an option. Graduated rents also ensured that even existing tenants had problems paying their rent.  

The Berlin state government did not want to stand by and watch this trend any longer, and on January 30, 2020, passed the Act on the Revision of Statutory Provisions on Rent Restrictions (MietenWoG Bln). In terms of content, the law regulated a rent freeze, a rent cap, as well as rent reductions and a cap on modernization apportionment for apartments that were ready for occupancy for the first time before January 01, 2014 and were not publicly subsidized. 

When the MietenWoG Bln came into force in February 2020, rents for 1.5 million apartments in Berlin were frozen. Since November 2020, the rent cap has meant that rents more than 20 percent above the upper limits have had to be reduced by the landlord. This affected an estimated 512,000 apartments, according to the research institute F+B. 

The opposition considered the rent cap to be illegal. Members of the Bundestag from the CDU/CSU and FDP submitted a so-called standards control complaint to the court. The issue was less the individual components of the law and more whether a federal state is allowed to enact such laws at all or whether rental law in Germany's federal system is a matter for the federal government.

What are the consequences of the Berlin rent cap ruling?

To understand the implications of the failure of the Berlin rent cap, we first need to clarify how the housing market in Berlin has developed since the rent cap came into effect.

How did the housing market change during the time the rent cap was in effect in Berlin? 

Dr. Chris Mulder: The rental market got tighter and after an initial hesitation more people were looking to buy. You know rental caps tend to scare rental corporations and they defer decisions to build more supply, while more renters hog their cheap rental space. This in effect reduces the available housing stock. After the initial uncertainty, compounded by Corona, we saw more and more people forced to look for homes to buy, in a market that is already tight. 

The Federal Constitutional Court has now overturned the Berlin rent cap. What does the ruling mean for landlords who had to lower rents because of the rent cap? 

Dr. Chris Mulder: They will, no doubt nearly all go back to the old rent. And because less has been built the market is tighter and they may raise prices even more. That is the sad outcome from this story. But I think there will be more landlords that remain interested in selling. They are now aware of the risk. And they should remain aware that after the elections the Federal government may very well give states more leeway to reign in out of control prices. 

Due to the rent cap, rents in Berlin were frozen and in some cases even lowered. Tenants now have to pay the old, higher rents again following the ruling by the Federal Constitutional Court. What impact will this have on the buyer's market? 

Dr. Chris Mulder: The direct impact is that more renters will be able to find a rental home and don't need to buy. The market is so tight in Berlin that the impact is likely to be modest. 

How will the ruling affect the housing market in Berlin in general? Does it make buying now less attractive again?

Dr. Chris Mulder: We see that Berlin is catching to our large urban markets. Most of that catching up has been done. Still buying remains very attractive, because of that catching up and the very low interest rates. For most people it is the lack of available supply and their own lack of savings that are the bottlenecks to purchase a home, and not that buying is somehow not attractive. 

There's no denying that rents have risen continuously in recent years and have reached a record high in Berlin. How can Berlin manage to provide affordable housing? 

Dr. Chris Mulder: Supply, supply, supply! The Berlin Senate needs to wake up and understand that supplying more housing is the key to keeping rents affordable. There is an urgent need to provide more land and infrastructure for affordable rental housing. That will benefit everyone. It will keep rental housing affordable, it will allow all those new industries that find Berlin very attractive to keep hiring out of town employees. It will keep Berlin vibrant, and diverse.

About Hypofriend

Hypofriend is Germany's fastest growing independent mortgage advisor. Founded in 2017 by Nick Mulder, his father Dr. Christian Mulder and later by Pavel Jurasek, the startup helps its customers make smarter financing decisions. Through its self-developed advisory and recommendation software, complicated correlations are presented in a detailed and understandable way. The team of nearly 40 engineers, economists and mortgage experts has already helped thousands of customers better understand housing finance and fulfill their dream of buying a property in Germany.

Contact

Julia Ptock | Content & PR Managerin | Email: Julia@hypofriend.de 

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Julia Ptock

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