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German property

Braking bad

A coming rent brake will sap a strengthening property market

Apr 4th 2015 | BERLIN | From the print edition

WHO doesn t like affordable housing? Press reports about sharp rent rises in

big cities prompted Germany s two biggest parties, upon forming a coalition in

late 2013, to attempt to turn into law the irresistible proposition that

everyone should be able to put a roof over their head without hardship. The

result is a rent brake , due to be applied later this year, which limits

increases in prices. As with all price controls, it is likely to lead to a

black market, while crimping supply. That, in turn, would hold back investment

in an economy that needs more of it.

Germans buy cars, not houses: just 46% of Germans own their homes, the lowest

rate in the European Union. But the idea that this nation of renters is being

squeezed by greedy landlords is not borne out by the data (see chart on next

page). In fact, Germans have done rather well from renting: apartments have

grown even as families have shrunk. In the former West Germany (for which data

go back furthest), apartment size per inhabitant has more than doubled since

1956-57, from 18 to 39 square metres. Meanwhile, throughout Germany, the

proportion of net pay spent on rent has stayed constant for 30 years, at about

23%.

Rents have only climbed significantly and consistently in Germany s biggest and

most prosperous cities. Wealthy Hamburg has seen average annual rises of 4-5%

since the financial crisis. In Berlin, which draws many young people and

non-Germans, rents have risen by 1-2% annually. In attractive central districts

(the kinds of places where journalists who write about out-of-control rents

tend to want to live) prices have risen much faster.

There is already a law in place that limits rent increases under an existing

lease, based on local housing costs. The brake concerns new leases: it prevents

landlords from charging rent that is more than 10% above the local average for

a comparable property. After howls from owners, many apartments will be

exempted: those first let after October 2014 (in order not to deter new

investment) and those that have been extensively renovated (defined as an

investment of a third of the property value or more). The brake will apply only

in tight markets, a term which it is up to the 16 federal states to define.

Berlin (a city-state) intends to apply the brake to all eligible housing as

soon as the law takes effect. It should have a big impact: an analysis by IW K

ln, a think-tank, found that 60% of the Berlin listings on a widely-used

flat-finding website would be over the 10% limit.

Hitting the brake

Economists are almost united in opposing the brake. A report by the German

Institute for Economic Research, another think-tank, details the worries. It is

likely to deter renovations of dilapidated properties, since they must be

lavish to justify higher rents. It may also deter construction, since the

exemption for new properties might not last. A black market is likely to spring

up, in which brokers pass bribes to owners from potential tenants willing to

pay more than the brake permits. Alternatively, landlords may stay within the

prescribed cap on rent, while asking for an inflated supplementary payment for

the use of kitchen equipment, which is typically paid for separately in German

lettings.

The meddling is occurring in a market that had been gaining strength. Current

ultra-low interest rates mean low returns on many other types of asset. With

rents rising landlords are getting keener on property as an investment.

Ordinary Germans, who tend not to buy stocks or bonds, but save in low-yielding

deposit accounts, are also warming to housing. At the same time, cheap

mortgages make it easier for renters to become buyers. Home-ownership rates

have begun ticking up, with some 190 billion ($206 billion) of property

changing hands in 2014, 50% more than in 2009.

With demand robust, house prices are rising too: between 2010 and 2014 they

climbed by 47% in Munich and 41% in Berlin. To some this may justify measures

to cool the market, including pouring cold water on rents and thus the

incentive to buy an investment property. But the rise in prices looks more like

an overdue adjustment than a bubble. An analysis by IW K ln, which takes into

account mortgage rates, forgone interest from other investments and likely

future price rises, concludes that changing economic conditions more than

justify the rise in prices.

A thriving property market would help nudge Germany away from an export-centred

growth model that looks in danger of running out of steam. Building more houses

would help lift the country s investment rate, which at 20% of GDP is below the

average of rich countries. Greater spending on home improvement would raise

consumption, too, as Germans splashed out on power tools and paint. By meddling

in a healthy market Germany s politicians are pumping up their own popularity

but not the country s prosperity.