Impact of the rent brake on German housing markets

In recent years, the demand for housing and hence rents in most growing German areas has steadily increased. In order to limit the rise in rents a new instrument, called rent brake, was introduced. The process was accompanied by controversial discussions among market participants, economists, and political parties. Finally, the new law was passed in 2014.According to the new rent act special rights will be granted to the federal states of Germany. They will be able to restrict the rents charged for re-letting in certain designated areas where housing demand and rents are high. In these areas, landlords will not be allowed to increase the rent beyond a maximum of 10% above the customary comparative rent.This discussion paper attempts to examine the legal, economic, social, and political aspects of the German rent brake. Firstly, the impacts based on an economic standard model are analyzed. The result of this analysis speaks clearly against the rent brake. Secondly, legal problems at execution level are identified. On the basis of market data it is shown that only a small part of Germany is really affected. Also this fact speaks against the rent brake, mainly due to unsolved implementation details. Thirdly, social policy aspects are taken into consideration. The findings show that the rent brake is perceived positive by most voters. It suggests the impression that the government does something for the tenants. Fourthly, from a strategic standpoint Merkel (CDU/CSU) wins at the expense of the coalition partner (SPD) and the opposition (Alliance 90/The Greens, THE LEFT), who originally developed the idea.