Corona has spared the housing market, but the regulatory virus is spreading

The corona virus has caused considerable damage to the commercial property market. However, the housing market is largely immune. Appreciation for one's own four walls has increased during the corona crisis and, in view of attractive financing conditions, is ensuring that purchase prices continue to rise sharply. The rise in residential rents has, however, slowed down. According to the recently published F+B-Wohn-Index, rents under new contracts fell by around 1 percent in the third quarter compared with the previous three months. Alongside the recession and increased unemployment, the improved supply of new housing and the substantial rise in rental levels are likely to have a dampening effect. However, rather than the decline in rents, the regulatory virus could become a risk for the housing market. Instruments such as the rent brake have been introduced to alleviate the consequences of the tight housing markets. However, they have had little effect, because at best they only address the symptoms. However, the scarce supply of housing as the cause of rising rents is being ignored.

The consequences of rampant regulation can currently be observed in the Berlin housing market. The rent cap decided at the beginning of the year dampens not only the rent but also and above all the supply. According to an evaluation by ImmoScout24, the rents offered for the apartments affected by the rent cap have fallen by 5 percent within one year up to September 2020. In contrast, the supply of rental apartments fell by almost 60 percent. In contrast, the supply of newer apartments built in 2014 or later, which are not subject to the rent cap, even increased slightly. If letting is no longer profitable, the apartments are taken off the market, for example for owner-occupancy or for sale.

According to the 2019 rent index, Berlin's rent level is rather low anyway, with a median for the basic rent of 6.72 euros per square meter. But this has not stopped the Berlin Senate from intervening in existing tenancies. With the second stage of the rent cap, existing tenants will also benefit from lower rents from the end of November onwards, if they exceed the permissible maximum rent by 20 percent. F+B estimates that around 500,000 apartments will be affected. The average rent saving potential is estimated at around 40 euros per apartment and month. The profiteers are, however, fewer tenants of cheaper apartments in 70s high-rise and prefabricated housing estates. In contrast, well-off Berliners who live in renovated and well-equipped Wilhelminian-style houses can be happy. Because the lowest reference rent and thus the highest rental savings are for buildings built up to 1918.

The individually manageable rent advantage is offset by disadvantages that can damage the housing market in the long run. According to F+B, the rent reduction results in a cumulative decline in rents of around 250 million euros annually. In order to limit the damage, the landlords will reduce the renovation costs, for example. For tenants, this will mean a reduction in the number of apartments they are increasingly used to. The loss of confidence caused by the encroachment on existing contracts could lead to investors deciding against the actually attractive and growing German capital and focusing more on other cities. The only way to help them find accommodation would be to build more new buildings. However, the number of new apartments approved for construction each year - around 20,000 - is already declining slightly.

Will other cities also introduce the rent cap if the Federal Constitutional Court does not reject it? The slowed increase in rents and the consequences shown speak against it. But the regulation of the real estate market is attractive for politicians. Many citizens support it, if limits are shown to the real estate industry. Moreover, the latter usually bears the costs. It was only at the beginning of November that the Federal Cabinet took action with the "conversion ban". The housing market, which is expected to become even more expensive in 2021, is likely to become a topic of discussion again in the upcoming federal elections. Investors will have to come to terms with this. In view of negative bond yields and the increased risks associated with commercial real estate, investment alternatives are just as rare as vacant apartments in Berlin Mitte.

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