Legal and regulatory barriers are already in existence for on-going lease contracts to limit the rise in lease prices but, until now did not exist for new tenancies. As a result, new tenancies carried up to a 30 % premium to on-going tenancies in the market.
This is how it works
The German parliament has now resolved an upper price limit which will apply to new tenancies. The landlord cannot charge rent in excess of 10% above the local reference rent. The aim is to ensure that even new housing remains affordable.
What is the local reference rent and where does it apply?
A local reference rent is a rent index calculated by the city administration to reflect qualified local rent conditions. The local reference rent is published and index linked. According to the law, the qualified rent index has to be adjusted every two years to market development and regenerated every four years. The rent control shall only be implemented in areas where the housing market is deemed to be tight. The law authorizes the federal states to allocate the are-as where the rent control should apply.
The rent control does not apply to all new buildings and extensively modernised apartments. This exception is to ensure that new buildings are still profitable for investors, to achieve a balance between investors and affordability.
Effects on the housing market
The price increase for new tenancies is bounded by the rent control. As a result, the local reference rent of all apartments becomes more important and the premium for new apartments will, in some circumstances, be affected.