Renting in Germany: haves and have nots

Photo by Felix Neudecker on Unsplash

Dear Reader,

One issue that has barely made the headlines during the election runup is the cost of living crisis - in particular, the soaring cost of housing.

This has annoyed Lukas Siebenkotten, head of the German Tenants' Association, who thinks that migration is getting far too much attention.

“Rising rents are pushing more and more households to their breaking point. Half of tenants in large cities are afraid that they will no longer be able to pay their rent in the future,” he said this week.

In that spirit, this week’s newsletter takes a look at the crisis in Germany’s rental market and asks: just how bad is it… and can it be solved?

The first thing we need to understand is that Germany is a country of tenants.

Whereas most other Europeans own the roof over their heads, Germans prefer to move into a home that someone else (more often than not a company) has the deeds to.

Homeownership in Europe ranges from two thirds of all households in France to close to 95 percent in Romania. Only Austria, Germany and Switzerland buck this trend.

In Germany, fewer than half of households own their own homes. In the major metropoles, four in five households pay rent to a landlord.

It is a curious anomaly. Explanations that are usually given include the prohibitive taxes one has to pay when buying a home, and the fact that the state built so much social housing after the war. These explanations seem a little superficial - they both would seem to be the result of societal preferences rather than the other way round.

Perhaps the deeper explanation is to be found in a widespread suspicion of owning assets of any sort, with Germans traditionally preferring to put their money in the safe haven of a savings account rather than “riskier” investments that are subject to the fluctuations of markets.

German prudence personified is Olaf Scholz, proud of a sparkonto, who lives as a tenant in Potsdam despite earning €30,000 a month.

It is often pointed out that this makes Germans, statistically, some of the poorest people in Europe, since they barely have any valuable assets.

On the flip side, I would guess that it also makes them some of the least indebted people on the continent, since behind the official statistics on “homeownership” surely hides “mortgage-ownership.”

There are practical advantages to a tenant society, too. In a properly functioning rental market, moving home to take advantage of a job opportunity, or to size up as your family grows, should be easier. Just cancel one contract and sign a new one. No need for lawyers or estate agents. Plus, you don’t need to bother about heating, repairs or cleaning the stairs: it’s all done for you.

However, the problem with the German rental market is that it isn’t properly functioning - and it hasn’t been for a long time.

One extreme case from recent months illustrates the problem. A Berlin housing company put 280 moderately priced apartments up for rent and received 43,000 applications… within half an hour!

As is the way of the world, when demand exceeds supply, prices go up.

In Berlin, the average rent has doubled between 2014 (when I moved to the city) and now. Back then, you could move into a 50 square-metre apartment for a basic rent of €400 a month. Today you’ll have to pay around €800. (The basic rent, or Kaltmiete, doesn’t include heating and maintenance costs that add a few hundred more euros to the price).

There is a stubborn myth that has established itself around this issue, which claims that all tenants in Germany are suffering under the burden of ever higher rents. One of the favourite campaigns of the German left is a demand to stop the Mietwahnsinn (rental craziness).

In fact, it is simply untrue that on average rents put a larger burden on households now than they did twenty years ago. If we are speaking about society as a whole, rental payments take up about the same percentage of people’s salary now as they did at the start of the century.

Another stubborn myth about the housing crisis: it is caused by a lack of living space. Therefore the solution, in the words of the CDU, is “build, build, build!”

That also isn’t borne out by the data. Even in Berlin, where the population has grown more than in almost any other city, construction has kept pace with the increase in population. There is just as much living space per head in the capital now as there was two decades ago.

The actual problem has more to do with the difference in price between old rental contracts and new ones. Older rental contracts are just much cheaper than new ones, which means that people are reluctant to move house unless they absolutely have to.

That is bad news for families. Young parents are finding increasingly imaginative ways to squeeze their whole family into their two-room inner city flats, while retirees across the street have more space than they know what to do with.

It is also bad news for the economy. A recent study found that the cost of new rents is reducing people’s willingness to move home to take advantage of a job opportunity.

To blame is Germany’s complex system of price controls. Something called the Kappungsgrenze applies to old tenancies and limits the rate at which they can go up each year.

The result is that old rents rise much more slowly than new ones. Official statistics show that a tenant in Berlin who moved into a 100-square-metre flat twenty five years ago pays an average €600 today. Someone on a new rental contract would pay close to double that.

In other words, a couple in their sixties whose children have moved out of the house have no incentive to downsize. They could move into a flat that is half the size and end up paying the same rent. So why bother? That’s why, in many larger cities, three or four room apartments in decent locations are as rare as hen’s teeth.

So, I would argue that one key element of dealing with Germany’s rental crisis is to reform or abolish the Kappungsgrenze. That’s not my idea, by the way, it is something that has been proposed by Dr. Steffen Sebastian, the head of the Federal Rental Commission.

In his words: "It's just not fair that the state provides extreme protection for people who have been paying a low rent for decades, regardless of whether they are needy or not, while others simply can't find affordable housing.”

But, what do the parties have to say?

Both Olaf Scholz’ Social Democrats and the Greens want to bring the price of new rental contracts under control by extending a price limit called the Mietpreisbremse (rental brake). First introduced in 2015, the rental brake was supposed to be a temporary measure to be kept in place until the housing stock had increased.

But, with new rents continuing to rise unabated, it has become permanent. In their manifesto, Olaf Scholz’ Social Democrats want to extend it for another four years.

The obvious design problem: the rental brake relies on the tenants to sue their landlord if their rent is too high - which almost never happens in practise. The Mietpreisbremse has been completely ineffective for the past nine years. So why should it magically start to work now?

Parties further to the left (Die Linke and the BSW) want to bring in a much tougher price control: the Mietpreisdeckel, or rental cap, in which the state would essentially dictate the level of rent landlords are allowed to charge.

Berlin attempted just such a price cap five years ago - and it didn’t go particularly well.

Firstly, it was thrown out by the constitutional court due to its infringement on property rights. You could try to change the constitution to make it legal, but there are other concerns.

When tried in Berlin, the rental cap crashed the rental market. Landlords simply took their properties off the market - rental offerings fell by half. This had something to do with the fact that landlords were waiting to see whether the law would be struck down by the courts. But, experience from other cities shows that rental caps just lead landlords to sell their assets on the unregulated property market.

Then there is the problem with the black market. When people are so desperate to find a property, estate agents start asking for finder fees, people are put onto semi-legal sub-tenancies, or women are offered rooms in exchange for sexual favours. During Berlin’s experiment with a rental cap, as the legal market collapsed, the black market flourished.

Another problem that tends to be ignored on the left: housing companies don’t just take the lost revenue on the chin. They respond by lowering maintenance costs. Ahead of Berlin’s rent freeze, one large housing company warned that districts would return to the way they looked during the GDR. “Buildings will fall into disrepair,” the landlord warned, saying that it would no longer paint the stairwells or look after the gardens.

To give housing companies their due, the rise in rents in a city like Berlin have been accompanied by a leap forward in living standards.

As hard as it may be for foreign readers to believe, some Berlin tenants still shared a toilet in the stairwell and heated their flats with coal ovens up until a few years ago.

What about the parties on the right, do they have any novel solutions?

According to the CDU, “the only way to ease the market is to increase supply. We need more new houses and apartments, faster and cheaper.” In their manifesto, they say that they want to simplify planning procedures, and create a new, cheaper building standard called the “easy standard”.

I’m not sure if that is a euphemism for selling building plots on green spaces like the Tempelhofer Feld, but I think it might be.

Further to the Right, the AfD say they want to upend the country’s tenant mentality altogether and “turn Germany into a nation of homeowners.” They want to sell off state-owned housing at a cheap rate and (I’m pretty sure contrary to EU law) Germans would have first dibs.

The only party who actually mention the Kappungsgrenze as needing reform are the Free Democrats. They say they want to “relax the rigid Kappungsgrenze for energy-efficient refurbishments so that the modernization of existing buildings can make progress.”

What solutions do you find convincing? Let me know in the comments.