The rent brake in Germany is once again at the centre of the political and professional debate – and not without reason. With a tenant rate of around 50 percent, Germany is one of the countries with the highest proportion of tenants in Europe, along with Switzerland. Interventions in the rental market therefore have far-reaching social and economic implications in this country.
Even before the Tenancy Law Amendment Act came into force in 2015, leading real estate economists doubted the usefulness of the measure: The rent brake “treats the symptoms, not the disease” was the general feedback. Originally designed as a short-term instrument, it was extended in 2020 – and the current governing coalition has decided on a further extension until 31 December 2029.
But the scientific evidence now clearly shows that the long-term effectiveness of this measure in creating affordable housing is not only highly doubtful, but also proves to be an obvious obstacle to private investment. And the social consequences are also striking: rent regulation reinforces the so-called “lock-in effect”. This means a more inefficient distribution of living space, as many tenants often remain in their apartments even though they are incorrectly sized, while growing families hardly find adequate housing in the metropolitan areas.
A look at other European countries shows that Germany is not alone in its rent control strategy – but that other countries are now critically questioning these measures. In Ireland, for example, a similar instrument was introduced in 2016. In contrast to Germany, however, the latest political developments there indicate a departure from the previous course: The new government coalition has publicly announced that the current rent regulation will be phased out or at least softened, due to a drastic decline in apartment completions and rapid increases in new rentals despite the interventions in the market. The Irish Prime Minister has signalled that he wants to fundamentally rethink the entire concept – with the aim of establishing a system that protects tenants but at the same time creates a stable and attractive investment environment for private and institutional investors.
Germany would do well to learn from this example. Instead of relying on regulatory measures that inhibit investment and only treat symptoms of structural problems, a paradigm shift would be needed – towards a reliable framework that promotes private and institutional housing, creates sustainable affordable housing, reduces misallocations and guarantees attractive return opportunities for investors.
