Analysis | Economic / Social Policy - City / Municipality / Region - Wohnen Germany Needs Federal Rent Control

A plan for a nationwide rent cap is on the table — it just has to be implemented

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Author

Andrej Holm,

Picture of a row of houses in Leipzig. While the sun illuminates the façade, the sky above darkens ominously.
A nationwide rent cap would be a powerful tool in limiting rent increases in existing contrasts and reducing excessive rent costs across Germany.
 
 

 

 

CC BY-SA 4.0, Photo: Wikimedia Commons / Don-Else

Due to the outgoing German government’s failure to agree upon an extension of the rent freeze introduced nearly a decade ago, that legislation is due to expire in 2025. Yet the existing law has had virtually no impact anyway, and the myriad other regulations under German tenant law have done little to adequately protect renters, while landlords continue to reap steep profits.

Andrej Holm is a social scientist at the Humboldt University of Berlin. His research focuses on gentrification and housing policy.

Introducing a nationwide rent cap can stop skyrocketing rents and keep housing affordable by restricting rent increases in existing contracts, implementing price caps for new rental contracts, and reducing excessive rents. What follows is an overview of legal measures that could provide German renters with much-needed relief.

Why Do We Need a Nationwide Rent Cap?

Rents do not just go up, landlords deliberately increase them. There is a reason why tenants in many cities and regions are paying more for housing: landlords are charging more and more money for rent. Germany-wide, existing rents have increased by an average of 14 percent since 2014. The most recent census data shows that rent in large cities has increased by almost 25 percent. The increase in the asking rent for new leases in major cities is even more pronounced, up by more than 40 percent since 2014. In cities such as Potsdam and Leipzig, the asking rent on new leases has increased by more than 50 percent over the past decade, and in Berlin, this figure has even doubled.

If the existing rent brake is allowed to expire this year, there will effectively no longer be a way to limit rent increases under tenancy law. There would only be commercial criminal laws left to stave off excessively high rents, but these provisions are almost impossible to implement in their current form. In addition, households are burdened by spiralling heating costs, which have risen by an average of 43 percent since 2021.

High rents make people poor. Due to the aforementioned developments, many people in Germany are already severely burdened by the cost of their rent. No household should have to spend more than 30 percent of its income on housing, including operating and heating costs. However, one in three tenant households exceeds this affordability limit, and one in six has to spend more than 40 percent of its income on housing. When a large portion of what is often a modest income to begin with is spent on rent, people have little left from which they can live.

High rents prevent a just and reasonable distribution of housing. Many middle-aged adults remain in large apartments after their children have moved out, which means that they don’t need all the extra space. Yet precisely these apartments are in high demand, especially among young families and flat-share communities. Due to the large disparity between existing rent prices and rent prices for new leases, there is little incentive for people in these situations to move into smaller apartments. Even experts from the real estate industry talk about “lock-in effects”, because fewer and fewer people are able to move house even if the place they live in no longer suits their living circumstances.

High rents increase social inequality. In Germany, more than 44 million people live in about 23 million rental units. Four million landlords generate income, revenue, and profit from the regular rental payments taken from the income and pensions of the renters who pay them. Each year, about 150 billion euro are paid in rent. However, the actual cost of maintaining, repairing, managing, and providing services for these properties amounts to just 60 billion euro. The remaining 90 billion accumulates wealth or profits for mostly private owners or companies.[1] Rent increases play a major role in this process of redistributing wealth from the bottom of the social order to the top.

High rents increase government spending. Higher rents also lead to an increase in state spending on housing costs and housing allowance (Wohngeld). In 2023, rents were subsidized with 21 billion euros from taxpayers’ money – 4.3 billion euros for housing allowance and 16.6 billion euros for housing costs (of which 11.6 billion euros came from the federal government and 5 billion euros from local municipalities). This is an increase of 43 percent compared to 2019.

How Would a Nationwide Rent Cap Work?

The nationwide rent cap would restrict rent increases in existing rental contracts, limit price increases on lease renewals, and reduce excessively high rents.

By combining various regulatory provisions, the nationwide rent cap would also take regional differences in market dynamics into consideration. The plan for a nationwide rent cap, the main features of which we already developed in 2021, differentiates between

  • areas with “housing markets which are not strained” (where the median asking rent is a maximum of 15 percent above existing rents, the vacancy rate is above 3 percent, and there is no population growth),
  • areas with “strained housing markets” (where the median asking rent is more than 15 percent above existing rents, the vacancy rate is less than 3 percent, and there is population growth), and
  • areas with “housing shortages” (where the median asking rent is more than 30 percent above existing rents, the vacancy rate is less than 2 percent, and there is population growth).

By combining elements of tenant and commercial criminal law that have already been successfully applied in the past, the nationwide rent cap can be implemented quickly and without legal hurdles.

Until a nationwide rent cap is fully implemented, a temporary rent freeze should be immediately introduced for existing dwellings both in areas with strained housing markets” and in those with housing shortages”. Rent increases in other areas should also be limited to a maximum of 2 percent per year.

A regionally tiered nationwide rent cap, to be rolled out during the temporary rent freeze, would consist of four pillars:

  1. Determining standard rent prices based on current rents (in all area types): A whole range of legal measures pertaining to rental and tenancy law are based on what is called the local standard rent”. These are determined through costly rental index surveys for apartments of different build years, sizes, and locations. This process also only factors in dwellings that have seen changes in the last six years (usually due to new leases and rent increases).

    As part of a nationwide rent cap, a true average rent based on actual rents paid should be established across the board, i.e. covering all area types. Sample analyses reveal that reference rent prices determined in this way would be up to 10 percent lower than results obtained using the current calculation methods. This first step alone could provide noticeable relief.

    The reference rents proposed here can be determined based on microcensus surveys or regional rent registries. The reference rents are to be adjusted according to the year in which the apartments were built and their features, but not according to their location.
  2. Limiting rent increases: In areas without “strained housing markets”, planned increases (up to the reference rent price) should be limited to a maximum of 10 percent every three years. In areas with “strained housing markets”, rent increases should be limited to a maximum of six percent every three years. In areas with “housing shortages”, rent increases should no longer be possible.

    In all three area types, an economic hardship clause will apply, allowing increases corresponding to the rise in operating costs (according to II. BV). Renovation costs of up to a maximum of 1 euro per square metre can be factored into the rent.
  3. Restrictions on raising the rent with a new contract: In areas with “housing markets which are not strained”, the rental price stipulated on a new contract may not exceed the respective existing average rents by more than 10 percent. In areas with “strained housing markets”, this limit will be set at a maximum of 6 percent above the reference rents. In this case, the rent cap would have a similar effect to the rent brake legislation, only in a tougher form. In areas with “housing shortages”, rents on new contracts should be limited to the reference rent price.
  4. Reducing excessive rents: Rents that are more than 20 percent above the respective reference rents are to be reduced in all areas. This is to be enforced by economic criminal law, so that tenants do not have to file complaints themselves.

What Are the Benefits of a Nationwide Rent Cap?

Financial relief for many people: The nationwide rent cap would significantly limit rent increases since the new, real average rents are lower than the current rent index prices. This would provide relief for many households in all cities and regions. In areas with “housing shortages”, it would be forbidden to increase rents at all; in strained housing markets, rent prices would increase less and at a markedly slower rate than they currently do.

Housing for all instead of only for people with high incomes: In areas with “strained housing markets” and in those with “housing shortages”, the rental prices on new contracts would be capped, giving low-income households improved chances of finding affordable housing.

Needs-based relocations instead of unfair distribution: This limitation on new rental prices would also create financial incentives for certain population groups to move into smaller apartments. This could contribute to a fairer distribution and a more efficient use of the existing housing stock, since it would allow more people to live in apartments that adequately meet their specific needs.

Affordable rents for many instead of high profits for a few: Lowering excessively high rents would not only enable more households to find affordable housing, it could also help to attenuate a significant driver of inequality, namely the upward redistribution of wealth via rental payments.

Translated by Hunter Bolin and Samuel Langer for Gegensatz Translation Collective .


[1] These estimates are based on the findings of Manfred Klose and Norbert Schwarz. In a simplified rough estimate based on the data for 2022, the average information available on the living space of rented apartments (74.5 sq m) and the average net rents (€7.40/sq m) was multiplied by the number of German households living in rented apartments (22,881,000). Calculations made by the real estate industry assume that administrative, maintenance, and management costs account for around 40 percent of the income received by rent.