Housing market regulation in Berlin. Opportunities and risks for investors and the society in general with special focus on rent control and social housing

Contents

Index of Figures

Index of Tables

Index of Abbreviations

1 Introduction
1.1 Problem Definition
1.2 Obj ectives and W ork Structure

2 Berlin Housing Market
2.1 Development of Housing Demand
2.1.1 Development of Population
2.1.2 Development of Household Structure
2.1.3 Development of Income
2.2 Development of Housing Supply
2.2.1 Construction Activity
2.2.2 Housing Stock
2.2.3 Development of Rents in Berlin
2.2.3.1 Asking Rents
2.2.3.2 Expert Li st of Representative Rents
2.3 Analysis of the Current Situation on the Housing Market

3 The Berlin Rent Cap
3.1 Gesetz zur Neuregelung gesetzlicher Vorschriften zur Mietenbegrenzung
3.2 Legal Evaluation of the Rent Cap
3.2.1 Principles of the Division of Legislative Powers
3.2.2 Mietrechtsnovellierungsgesetz - MietNovG
3.2.3 Legal Opinion in Favor of the Rent Cap
3.2.4 Legal Opinion against the Rent Cap
3.2.4.1 Analysis of the Formal Constitutionality
3.2.4.2 Analysis of the Material Constitutionality
3.2.4.2.1 Compatibility with Article 14 (1) GG
3.2.4.2.1.1 Scope, Protection and Encroachment on the Fundamental Right..
3.2.4.2.1.2 Constitutional Justification
3.2.4.2.1.2.1 Legitimate Purpose and Suitability
3.2.4.2.1.2.2 Necessity
3.2.4.2.1.2.3 Proportionality in the Narrower Sense
3.2.4.2.1.2.3.1 Rent Freeze
3.2.4.2.1.2.3.2 Modernization Measures
3.2.4.2.1.2.3.3 Rent Ceilings
3.2.4.2.2 Equal and Unequal Treatment - Proportionality Test within the Framework of Article 3 (1) GG
3.3 Effects of the Rent Cap on Society and Investors
3.3.1 Possible Economic Effects of the Berlin Rent Cap
3.3.1.1 Housing Demand
3.3.1.2 Moving Behavior and Mismatching in the Housing Market
3.3.1.3 Sale of Apartments to Owner-Occupiers
3.3.1.4 Investments in New Construction
3.3.1.5 Investments in the Existing Housing Stock
3.3.2 Empirical Evidence from Other Countries
3.3.2.1 Rent Control in San Francisco
3.3.2.2 Removal of Rent Control in Norway

4 Social Housing
4.1 Social Housing in Germany
4.2 Social Housing in Berlin
4.2.1 Households Eligible to Public Housing
4.2.2 Funding Modalities
4.2.3 Development of Social Housing Stock
4.2.4 New Construction Subsidies for Social Rental Housing
4.3 Social Housing as an Investment
4.3.1 Investment Reluctance of Private Investors
4.3.1.1 Building Costs
4.3.1.2 Microeconomic Restrictions
4.3.2 Private Housing Companies Engaging in Social Housing Construction
4.3.3 Incentives Set for Investments in Social Housing
4.3.4 Neue Wohnungsgemeinnützigkeit

5 Conclusion
5.1 Achievement of Objectives
5.2 Outlook

List of Sources

Index of Figures

Figure 1: Population Development in Berlin 2009-2019

Figure 2: Development of the Household Structure in Berlin 2009-2018*

Figure 3: Development of Monthly Median Household Net Income 2009-2018 and Yearly Median Income of Private Household per Inhabitant 2009-2018 in Berlin

Figure 4: Distribution of Monthly Median Household Net Income in Berlin in 2018

Figure 5: Apartments Approved for Construction in Berlin 2009-2018

Figure 6: Completed Apartments in Berlin 2009-2019

Figure 7: Construction Backlog in Residential and Non-Residential Buildings

Figure 8: Housing Stock Classified by Building Structure in 2018

Figure 9: Development of the Housing Stock in Berlin 2009-2018

Figure 10: Number of Converted Apartments in Berlin 2009-2018

Figure 11: Development of Median Asking Rent (Net Cold) for Apartments 2015- 2019 in €/sqm

Figure 12: Development of the Local Comparative Rent (Net Cold) based on the Berlin

Expert List of Representative Rents 2009-2019

Figure 13: Selected Indexed Housing Market Indicators in Comparison 2014 - 2018 ..

Figure 14: Principle of Proportionality

Figure 15: Building Completions by Developers in Berlin *

Figure 16: Rent Control Status and According Building Conditions in New York City 46 Figure 17: The Average Number of Housing for Rent and Housing Wanted Advertisements Listed in Afterposten between 1970 and 2008

Figure 18: The Proportion of the Housing for Rent Advertisements in the Newspaper Aftenposten in the Five First Weekdays in August Stating an Asking Rent in Five Year Intervals

Figure 19: Federal compensation payments from 2007-2019 in Million €

Figure 20: Proportion of Households Eligible for Social Housing in the Berlin Districts in 2018

Figure 21: Number of Holders of a Certificate of Eligibility to Public Housing by Household Size in Berlin 2009-2019

Figure 22: Share of Rent-Controlled and Occupancy-Controlled Apartments in the Rental

Housing Stock in Berlin's Districts in %

Figure 23: Development and Forecast of the Social Rental Housing Stock in Berlin from 2009 to 2028

Figure 24: Development and Forecast of the Occupancy-Controlled Housing Stock (BelBindG and Mod/InstRL 95) from 2009 to 2028

Figure 25: Number of Building Permits for Subsidized Housing and Completed Subsidized Apartments 2014-2019 within the Framework of the IBB Wohnungsneubaufonds

Figure 26: Subsidized Apartments (Permits) and Privately Financed Apartments of the IBB Wohnungsneubaufonds from 2014 until 2019

Figure 27: Construction Cost Development in Berlin-Brandenburg 2007 - 2015

Figure 28: Effective interest rate for mortgage loans in Germany in the years from 2000 to 2018

Figure 29: New Construction Costs, Tax Exemption and Land Costs in €

Index of Tables

Table 1: Maximum Rents Permitted According to Art. 1 § 6 (1) MietenWoG Bln

Table 2: Berlin Expert List of Representative Rents 2019

Table 3: The Composition of the Rental Market in Norway *

Table 4: Social Housing in the City Center with Upscale Furnishings: Model calculations I-III

Table 5: Social Housing on the Outskirts with Simple Amenities: Model calculations IV- VI

Table 6: Composition of the Average Costs of Construction of an Apartment Building

Table 7: Construction Costs, Tax Amounts and Tax Shares

Table 8: Effects of Tax Exemption and Free Transfer of Land on Refinancing Costs and the Net Cold Cost-Based Rent

Table 9: Impact of the Combination of all Support Mechanisms on the Monthly Cost- Based rent

Index of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

This thesis deals with the interventions of the Berliner Landesregierung in the housing market. Since this is a German topic, individual words and terms are listed in German in the text.

1.1 Problem Definition

Affordable housing in German metropolitan areas has increasingly become a controver­sial and emotionally discussed topic in public reporting over the last 10 years.¹ In the wake of rising demand combined with insufficient supply, strong rent increases were wit­nessed in many places.² To fight the issue of continuous rent increases, the German fed­eral government introduced the Mietpreisbremse on the federal level in 2015 (Compare Art. 1-4 Mietrechtsnovellierungsgesetz (MietenNovG).

The shortage of affordable housing is particularly problematic for tenants in a housing market like Berlin's, which has an 84 % share of rental apartments.³ An analysis of the real estate portal Immowelt has shown that the average asking rent (Angebotsmiete) per square meter (sqm) has more than doubled in the German capital in the period from 2009 to 2019. This increase in asking rent puts Berlin ahead of all other major German cities.⁴ At the same time, the stock of social housing is continuously decreasing. As a result, access to the housing market for the poorest segment of the population is getting more and more difficult. Popular discontent with the situation on the housing market has reached the point where tenants' associations are openly calling for the expropriation of large profit-oriented housing corporations.⁵

In response to the growing shortage of affordable housing in the German capital and the ongoing protests of the society, the Berliner Landesregierung has further tightened rent regulation by introducing a rent cap in 2020 (Compare Art. 1-4 Gesetz zur Mietenbegren- zung im Wohnungswesen in Berlin (MietenWoG Bln). The underlying Landesgesetz ini­tially freezes the rent of 1.5 million rental apartments in Berlin for five years from the effective date of the law.⁶ In addition, to increase the housing supply, the Land Berlin has been subsidizing the construction of new social housing since 2014.⁷

1.2 Objectives and Work Structure

This thesis begins with an overview of Berlin’s current housing market situation. The development of housing demand and housing supply is presented and then put into con­text with each other. The third chapter discusses the Berlin rent cap. First, the underlying law is explained before the legal evaluation of the rent cap is carried out. In the first step, the formal constitutionality of the law is examined. Thereafter, the material constitution­ality is analyzed regarding the compatibility of the rent cap with Article 14 and 3 GG. In the following, possible economic effects of the rent cap are presented and complemented by an overview on empirical data from studies on rent control. The fourth chapter deals with social housing. As in the second chapter, the current situation in this housing seg­ment in Berlin is presented first. Afterwards, social housing as an investment is examined. In this context, the reluctance of private investors to invest in affordable housing is dis­cussed and conditions are explained under which construction activity in social housing could be increased in a way that is worthwhile for both investors and society.

This thesis aims to examine which interventions in the Berlin housing market with the intention of increasing affordable housing are carried out by the Berliner Landesregier­ung and how they are to be evaluated against the background of the resulting opportunities and risks for investors and society in general.

2 Berlin Housing Market

The Berlin housing market essentially consists of tenants and landlords. Landlords repre­sent the providers of housing and tenants demand the living space.

2.1 Development of Housing Demand

To understand the development of housing demand, several indicators have to be consid­ered. The following subchapters deal with the development of the Berlin population, household structure and the development of income of Berlin residents.

2.1.1 Development of Population

Berlin's population has been growing dynamically for several years. This development continued in 2019, although at a slightly slower pace, with an increase of 24,665 people. The growth dynamics has declined since 2017. While annual net gains of40,000 to 50,000 people were recorded between 2012 and 2016, the population gain declined annually thereafter. Nevertheless, Berlin's population reached 3,669,491 people in 2019, which was the highest value since World War II.8

Figure 1: Population Development in Berlin 2009-2019

Abbildung in dieser Leseprobe nicht enthalten

Source: In Statista, Berlin Population, 2020, no page number; Statistisches Bundesamt, Population Development, 2021, no page number

2.1.2 Development of Household Structure

The number of households in Berlin rose to 2,026,300 in 2018. Single-person households continued to dominate with a share of just under 53 %, while two-person households accounted for around 28 %. Around one in ten households was a three-person household, while the share of households with four or more persons was only 9 %. In total, there were 1,642,000 one- and two-person household in 2018. In line with this number, the average household size in Berlin was 1.8 persons in 2018.⁸

Figure 2: Development of the Household Structure in Berlin 2009-2018*

Abbildung in dieser Leseprobe nicht enthalten

Source: In Investitionsbank Berlin, Housing Market, 2020, p. 28

2.1.3 Development of Income

The monthly median household net income in Berlin increased by a total of 40.3 % from 2009 to 2018. In 2018, the net household income was € 2,100, up € 75.00 compared to the previous year. This represents an increase of 3.57 % from 2017.⁹ Between 2009 and 2017, the yearly median income of private households per inhabitant in Berlin grew by around 17 %, reaching € 20,249 in 2017¹⁰.¹¹

Figure 3: Development of Monthly Median Household Net Income 2009-2018 and Yearly Median Income of Private Household per Inhabitant 2009-2018 in Berlin

Abbildung in dieser Leseprobe nicht enthalten

Source: In Amt für Statistik Berlin-Brandenburg, Mikrozensus, 2020, no page number; Amt für Statistik Berlin-Brandenburg, National Accounts, no year, no page number

Around 23 % of all Berlin households had a net household income of less than € 1,300 per month in 2018. A quarter of households had a median household net income of be­tween € 1,300 and less than € 2,000. Accordingly, more than half of all Berlin households had a median household net income of at least € 2,000. Compared with the previous year, the share of the three lowest income brackets up to € 1,500 fell by 2.7 %, while the share of the highest income bracket, from € 3,200 per month, increased by 1.9 %.¹²

Figure 4: Distribution of Monthly Median Household Net Income in Berlin in 2018

Abbildung in dieser Leseprobe nicht enthalten

Source: In Investitionsbank Berlin, Housing Market, 2020, p. 29

2.2 Development of Housing Supply

The development of housing supply is also determined by several factors. This chapter looks at the construction activity, the structure of the existing housing stock and the de­velopment of rents.

2.2.1 Construction Activity

The number of apartments approved for construction represents the most important indi­cator of future housing supply. Between 2010 and 2016, there was dynamic growth with a total of more than 100,000 apartments approved, primarily in multi-story apartment construction (Geschosswohnungsbau). Since 2017, the total number of new housing per­mits issued each year has declined slightly, reaching 24,218 new permits in 2018.¹³

Figure 5: Apartments Approved for Construction in Berlin 2009-2018

Abbildung in dieser Leseprobe nicht enthalten

Source: In Investitionsbank Berlin, Housing Market, 2020, p. 36; Amt für Statistik Berlin­Brandenburg, Building Permits Berlin, 2014, p.12

In 2018, 16,706 apartments were completed in Berlin. This presents an increase of 1,037 dwellings compared to 2017. The long-term trend of an increasing number of apartments completed annually thus continued in 2018. The completion rate, which reflects the num­ber of completed apartments per 1,000 inhabitants, rose to 4.5 in 2018. It significantly exceeds the German average of 3.4 completed apartments per 1,000 inhabitants. Multi­story apartment construction accounted for the majority of completed apartments in Ber­lin. 12,858 flats were built in this segment in 2018. This corresponds to a share of 77 % of total construction activity in 2018. This figure also represents an increase of more than nine times compared to the 2,688 apartments completed in multi-family buildings in 2009. Construction work on residential and non-residential buildings, for example attic conversion and changes of use of certain building parts, accounted for the second-largest share of construction activity at 13.4 % in 2018.15

Figure 6: Completed Apartments in Berlin 2009-2019

Abbildung in dieser Leseprobe nicht enthalten

Source: In Investitionsbank Berlin, Housing Market, 2020, p. 37

A comparative analysis of the development of building permits, construction completions and the construction backlog (Bauüberhang) allows conclusions to be drawn about past and future construction activity. Construction backlogs show the discrepancy between the approved and completed apartments and are classified based on construction progress. They can usually be justified by the time it takes to complete a building, which is usually two to three years. However, construction backlogs can also occur as a result of legal delays, speculation or capacity bottlenecks in the construction industry. At the end of 2018, the number of new apartments approved but not yet completed was at an all-time high of 64,083 apartments. 16

Figure 7: Construction Backlog in Residential and Non-Residential Buildings

Abbildung in dieser Leseprobe nicht enthalten

Source: In Investitionsbank Berlin, Housing Market, 2020, p. 40

2.2.2 Housing Stock

In 2018, Berlin's housing stock amounted to 1,949,252 apartments, of which 1,688,072 apartments, 87 %, were in multi-family buildings. 203,903 units, 11 %, were in the single- and two-family house segment. The share of rental apartments in the Berlin housing mar­ket was about 84 % in 2018, amounting to 1,644,400 apartments¹⁴.¹⁵

Figure 8: Housing Stock Classified by Building Structure in 2018

Abbildung in dieser Leseprobe nicht enthalten

Source: In Investitionsbank Berlin, Housing Market, 2020, p. 43

The total housing stock increased from 1,894,564 apartments in 2009 to 1,949,252 flats in 2018. This corresponds to an overall increase of about 3 % over the period under re- view.¹⁶

Figure 9: Development of the Housing Stock in Berlin 2009-2018

Abbildung in dieser Leseprobe nicht enthalten

Source: In Amt für Statistik Berlin-Brandenburg, Buildings and Housing, 2020, no page number

The changing share of rental apartments in the total housing stock is largely due to the conversion of rental apartments into condominiums. Between 2009 and 2018, a total of 103,873 rental apartments were converted into condominiums. With 12,836 apartments, around 12.4 % of these conversions took place in 2018. This corresponds to a share of 0.78 % of the total rental housing stock. The increasing number of milieu protection areas in Berlin, based on the Erhaltungsverordnung passed by the Berliner Senat in 2015, may be one reason for the declining conversion figures, compared to the high value of 2015.¹⁷ In these areas, condominium conversions may only be carried out with the permission of the respective district office.¹⁸

Figure 10: Number of Converted Apartments in Berlin 2009-2018

Abbildung in dieser Leseprobe nicht enthalten

Source: In Investitionsbank Berlin, Housing Market, 2020, p. 45

2.2.3 Development of Rents in Berlin

The development of rents is particularly relevant for tenants looking for affordable hous­ing. Furthermore, the rent level in a certain area plays an important role in the decision­making of investors.

2.2.3.1 Asking Rents

The development of Berlin's rental housing market is primarily determined by the con­clusion of new rental agreements. However, asking rents are available for submarkets at best. Not all housing providers advertise their apartments on media platforms, e.g., mu­nicipal housing companies. Consequently, there is no data available on all asking rents across all submarkets in Berlin. Therefore, the current market developments in the city’s rental market are derived from the accessible asking rents stated in landlord’s advertise­ments on various media platforms. Asking rents can be analyzed for the existing housing stock, newly constructed flats and both segments combined.22

Over the years, a steady increase in median asking rents could be observed, peaking at € 10.70/sqm in the fourth quarter of 2018. This trend did not continue in 2019 as me­dian asking rents slightly fell. Over the observation period from 2015 to 2019, the median asking rent increased by 23.5 % from the first quarter of 2015 standing at € 8.65/sqm to € 10.68/sqm in the fourth quarter of 2019. Median asking rents in new construction were on the one hand significantly higher than median asking rents in the existing housing stock segment and on the other hand, above the overall level for both segments combined during the period under review.23

Figure 11: Development of Median Asking Rent (Net Cold) for Apartments 2015­2019 in €/sqm

Abbildung in dieser Leseprobe nicht enthalten

Source: In Investitionsbank Berlin, Housing Market, 2020, p. 64

Comparing Berlin's districts, the median asking rents varied. In 2019, the highest median asking rent of € 13.45/sqm was reported in Berlin-Mitte whereas the district Marzahn­Hellersdorf had the lowest median asking rent of € 7.90/sqm. Furthermore, asking rent can be analyzed by housing provider type. In 2019, the municipal housing associations charged a median asking rent of € 7.13/sqm, well below the Berlin-wide average of € 10.45/sqm. The same applied to housing cooperatives whose median asking rent amounted to € 7.23/sqm in the same year. The situation was different for apartments owned by private housing companies, property management companies or real estate agents. With a median asking rent of € 11.18/sqm, they were above the Berlin-wide av­erage. Moreover, their median asking rent significantly exceeded the ones of the other housing providers.¹⁹

2.2.3.2 Expert List of Representative Rents

A new expert list of representative rents²⁰ (qualifizierter Mietspiegel) of Berlin is pub­lished every two years, most recently in May 2019. Based on an empirical representative survey, it reflects the local comparative rent²¹ (ortsübliche Vergleichsmiete) based on the net cold rent. The expert list of representative rents thus serves as a representative source for making statements about the local comparative rent in the non-rent-controlled housing stock. It covers tenancy agreements that were concluded or changed within a period of four years prior to the expert list’s reporting date. Tenancy agreements that have remained unchanged for many years are generally not included in the calculation. Rent-controlled social housing is also excluded from the analysis.²²

The current expert list of representative rents shows an average local comparative rent of € 6.72/sqm. This represents an increase of 2.6 % compared to the value of 2017 that stood at € 6.39/sqm. Between the reporting date in 2008 that led to the expert list of representa­tive rents of 2009 and the reporting date in 2018 which was followed by the expert list of representative rents of 2019, the average local comparative rent grew by 39.1 %, from € 4.83/sqm to € 6.72/sqm.28

Figure 12: Development of the Local Comparative Rent (Net Cold) based on the Berlin Expert List of Representative Rents 2009-2019

Abbildung in dieser Leseprobe nicht enthalten

Source: In Investitionsbank Berlin, Housing Market, 2020, p. 69

2.3 Analysis of the Current Situation on the Housing Market

In order to be able to evaluate the current situation on the Berlin housing market, the different facts presented so far must be put into context with one another. This is done in this chapter for the period from 2014 to 2018.

Figure 13 illustrates that all the indicators considered for this analysis were characterized by mostly dynamic growth in the period under review. The strongest increase was rec­orded for asking rents, which rose by about 25 % between 2014 and 2018. The local comparative rent, net cold, which is calculated based on both existing and newly con­cluded tenancy agreements, increased by 15.2 % over the same period. The population of Berlin grew by 5.0 %, 175,000 people, between 2014 and 2018. The growth in the housing stock was comparatively lower at 3.0 %, and thus, the excess demand continued to in­crease. The rising costs of housing were offset by an increase in the disposable income of private households per inhabitant. However, at 9.9 % growth in the period under review, it has developed much less dynamically than the median asking rent and the local com­parative rent. This leads to households having to continuously spend a higher share of their income on housing costs.29

Figure 13: Selected Indexed Housing Market Indicators in Comparison 2014 - 2018 Index Value (2014 = 100)

Abbildung in dieser Leseprobe nicht enthalten

Source: In Investitionsbank Berlin, Housing Market, 2020, p. 74

Moreover, the comparison of the housing and household structure underlines the excess demand. In a functioning housing market, demand and supply would need to balance each other out. This means that there would have to be an apartment for every household. This is true even if not every household needs an apartment because of flat shares or if not every apartment is available on the rental market when it is used a holiday home. Thus, the comparison of housing and household structure allows conclusions to be drawn about market coverage and the housing supply situation on Berlin’s rental housing market.²³

In 2018, 2,026,300 households existed in Berlin, not including residents of residential homes. They are not considered private households. The housing stock in Berlin com­prised a total of 1,921,716 apartments in 2018. The number of apartments in residential homes was also deducted here.²⁴ The comparison of number of households and housing stock thus results in a supply deficit of around 104,600 apartments for 2018. Furthermore, in a functioning housing market, the residential housing stock would also be comple­mented by a fluctuation reserve of 2.0 %. This is a buffer of apartments that are tempo­rarily unoccupied, for example due to relocations. Adding this 2.0 % results in a total supply deficit of around 145,000 apartments in Berlin in 2018.²⁵

3 The Berlin Rent Cap

This chapter deals with the regulations on rent control enacted by the Berliner Landesre­gierung in response to the tensions in the housing market. The rent cap is analyzed from a legal and economic point of view.

3.1 Gesetz zur Neuregelung gesetzlicher Vorschriften zur Mietenbegren­ zung

The Gesetz zur Neuregelung gesetzlicher Vorschriften zur Mietenbegrenzung (Mieten- WoG Bln), commonly known as rent cap (Mietendeckel), came into force on February 23, 2020 after it had been passed by the Abgeordnetenhaus von Berlin. It is a law of the Land Berlin that determines rent caps based on the Lands authority for Wohnungswesen and prohibits exceeding these caps, including fines for violations of the law (Compare Art. 1 MietenWoG Bln). The law is initially limited to a period of 5 years (Compare Art. 4 (2) MietenWoG Bln).

The rent cap does not apply to publicly subsidized housing, nor to housing for which public funds have been granted from public budgets for modernization and repair and which is further subject to rent control. Moreover, the law excludes new buildings that became ready for occupation for the first time on or after January 1, 2014. It also does not cover former housing permanently uninhabitable and unoccupied that has been restored for residential purposes at a cost corresponding to the expenses for the construction of newly constructed buildings. Furthermore, the law does not apply to residential units in dormitories and housing provided by a legal person under public law or a recognized private welfare institution (Compare Art. 1 Section 1 MietenWoG Bln).

Art. 1 § 3 of the law rules the freezing of rents. It states that in an existing tenancy, it is forbidden to demand a rent exceeding the net rent effectively agreed on June 18, 2019, the day the Berliner Senat decided on the key points of the law. This also invalidates any contractual agreements on stepped rent or index rent leases (Compare Art. 1 Section 3 (1) MietenWoG Bln). June 18, 2019 as an effective date was chosen to prevent expected rent increases for tenants as soon as the details of the law were announced to the public.33 For living space that was first let after June 18, 2019 and before the entry into force of the act on February 23, 2020, the effective date is not relevant. In this case, the rent agreed at the time of letting applies. The same applies to housing re-let between June 18, 2019 and February 23, 2020, provided that the tenancy continued when the act entered into force (Compare Art. 1 Section 3 (2) MietenWoG Bln).

From January 1, 2022, the net rent agreed on June 18, 2019 increases annually by the percentage of inflation measured on December 31 of the previous year, but not by more than 1.3 %. This shall not apply if this results in rent ceilings under Art. 1 § 6 being exceeded (Compare Art. 1 Section 3 (4) MietenWoG Bln).

Art. 1 § 4 rules that for re-letting and first-time letting of the living space after February 23, 2020, the rent ceilings defined in Art. 1 § 6 and § 7 apply. Ceilings for determining the permissible monthly rent are based on the living space of a dwelling. (Compare Art. 1 Section 4 MietenWoG Bln).

Table 1: Maximum Rents Permitted According to Art. 1 § 6 (1) MietenWoG Bln

Abbildung in dieser Leseprobe nicht enthalten

Source: In Art. 1 Section 6 (1) MietenWoG Bln

If the living space is in buildings with no more than two flats, the rent ceiling increases by 10 % (Compare Art. 1 Section 6 (2) MietenWoG Bln). For living space with modern furnishings, the rent ceiling is increased by € 1.00/sqm. A dwelling is considered to be modern if it has at least three of the following five facilities (Compare Art. 1 Section 6 (3) MietenWoG Bln):

- Elevator accessible without thresholds from the flat and from the entrance
- Built-in kitchen
- High-quality sanitary equipment
- High-quality floor covering in most of the rooms
- Energy consumption value of less than 120 kWh/sqm a

According to Art. 1 § 7, the law also limits the rent increase possibility to € 1.00/sqm after a modernization carried out due to one of the following reasons (Compare Art. 1 Section 7 (1) MietenWoG Bln):

- Legal obligation
- Thermal insulation of the building envelope, basement ceiling, top floor ceiling or roof
- Energetic window renewal
- Heating system replacement with heating system optimization
- Installation of a lift
- Removing barriers by eliminating thresholds, door widening or remodeling bath­rooms

Even if multiple modernizations take place during the period of validity of the Mieten­WoG Bln, the rent increase limit of € 1.00/sqm may not be exceeded (Compare Art. 1 Section 7 (1) MietenWoG Bln).

In order to avoid undue hardship based on this law, Art. 1 § 8 rules that the Investi­tionsbank Berlin (IBB) may, upon application by the landlords, approve a higher rent than the one permitted under Art. 1 §§ 3 to 6 for the current tenancy and all subsequent tenan­cies, inasmuch as this is necessary for reasons beyond the landlords' control (Compare Art. 1 Section 8 (1) MietenWoG Bln). Undue hardship is particularly considered to exist if not increasing the rent permitted under Art. 1 §§ 3 to 6 would lead to losses for the landlords or to a threat to the substance of the relevant business entity in the long run. A business entity comprises all apartments and buildings that are jointly managed and have a direct spatial connection (Compare Art. 1 Section 8 (2) MietenWoG Bln). If, due to the hardship clause, a higher rent than permitted according to Art. 1 § 6 is granted, tenants can apply for a rent subsidy from the IBB. The maximum rent subsidy is limited to the difference amount between the rent ceiling according to Art. 1 § 6 and the actual de­manded rent (Compare Art. 1 Section 9 MietenWoG Bln).

Moreover, Art. 1 § 5 states the prohibition on demanding an excessive rent. It came into force on November 23, 2020, nine months after the promulgation of the law. Since that day, tenants have received the possibility to reduce excess rent. According to Art. 1 § 5, a rent is too high if it exceeds the rent caps defined in Art. 1 §§ 6 or 7 by more than 20 % and is not granted under a hardship clause defined in Art. 1 § 8. For the definition of the highest permissible rent, the quality of the residential area must be considered too. Simple residential locations allow for a subtraction of € 0.28/sqm, for medium quality locations, € 0.09/sqm can be deducted from the rent. If the dwelling is in a good residential area, landlords can charge an extra amount of € 0.74/sqm (Compare Art. 1 Section 5 (1) Mieten­WoG Bln).

3.2 Legal Evaluation of the Rent Cap

In the following, the rent cap is reviewed from a legal perspective. In this context, the question of whether the law is formally and materially constitutional should be clarified.

3.2.1 Principles of the Division of Legislative Powers

The Grundgesetz (GG) of the Federal Republic of Germany generally confers legislative powers on the Länder unless the GG explicitly confers legislative power onto the Feder­ation (Compare Art. 70 (1) GG). Whether the Federation or the Länder are responsible for legislation is defined by the provisions on ausschließliche Gesetzgebung of the Fed­eration and konkurrierende Gesetzgebung defined in the German constitution (Compare Art. 70 (2) GG). Within the framework of konkurrierende Gesetzgebung, the Länder have the power to pass a law so long as and to the extent that the Federation has not previously exercised legislative power in that specific matter by enacting a law (Compare Art. 72 (1) GG).

On matters within the konkurrierende Gesetzgebung and according to its permission (Compare Art. 74 (1) (3) GG), the Federal Legislator has already exercised its right to enact several laws in the area of Bürgerliches Recht34.35 This circumstance forbids the Länder to enact laws in the area of Bürgerliches Recht. A blocking effect for legislation occurs.36

3.2.2 Mietrechtsnovellierungsgesetz - MietNovG

Soziales Mietpreisrecht as part of soziales Mietrecht has traditionally been a part of Bür­gerliches Recht. Thus, it was the Federation that defined regulations for the area of soziales Mietpreisrecht that entered into force on June 1, 20 1 5.37 The Gesetz zur Dämp­fung des Mietanstiegs auf angespannten Wohnungsmärkten und zur Stärkung des Bestel­lerprinzips bei der Wohnungsvermittlung (Mietrechtsnovellierungsgesetz - MietNovG), commonly known as Mietpreisbremse, rules the maximum permissible rent that can be charged for living space at the beginning of a tenancy. The provisions of the MietNovG are listed in the Bürgerliches Gesetzbuch (BGB). The rent at the beginning of the tenancy may not exceed the local comparative rent, which is determined based on the expert list of representative rents, by more than 10 %, provided that it concerns living space (Com­pare Section 556d (1) BGB). In order for this rule to apply, the respective Landesregier­ung must have previously declared this residential area, by means of a legal ordinance (Verordnungsermächtigung) to be a tight residential area with much pressure on the hous­ing market (Compare Section 556d (2) BGB). Moreover, if the rent last owed by the pre­vious tenant is higher than the rent permitted under § 556d (1) BGB, a rent up to the amount of the previous total may be agreed on with the new tenant (Compare Section 556e (1) BGB).

Regarding existing tenancies, the BGB essentially defines two regulations. First, if rent has not been increased during the previous fifteen months at the time of the planned rent increase, the landlord can demand an increase up to the local comparative rent (Compare Section 558 (1) BGB). Moreover, the rent may not be increased by more than 20 % within 3 years. This cap is reduced to 15 % on condition that adequate housing is particularly scarce for the population of a municipality or part of a municipality. These areas must also be determined by the Landesregierungen by legal ordinance for a maximum of five years (Compare Section 558 (3) BGB).

Since January, 2019, before a new tenancy is concluded, landlords must disclose to the tenant, unsolicited and in written form, how much rent was demanded from the previous tenant (Compare Section 556g (1a) (1) BGB). The rent demanded one year before the termination of the previous tenancy is decisive (Compare Section 556e (1) BGB). The regulation applies in all cases in which the landlord demands a rent which exceeds the local comparative rent by more than 10 % (Compare Section 556g (1) BGB). Apart from that, § 556d shall not apply to apartments that are used and rented out for the first time after October 1, 2014 (Compare Section 556f (1) (1) BGB). Moreover, §§ 556d and 556e shall not apply to the first letting after an extensive modernization (Compare Section 556f (1) (2) BGB).

3.2.3 Legal Opinion in Favor of the Rent Cap

On behalf of the SPD parliamentary party in the Berliner Abgeordnetenhaus, the lawyers Prof. Dr. Franz C. Mayer and Prof. Dr. Markus Artz have drawn up a legal opinion on the rent cap. They consider öffentliche and privatrechtliche aspects in their paper.38

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¹ Compare Kommer, G., Home, 2016, p. 115 et seqq.

² Compare Holm, A., Rent Increases, 2014, p. 7.

³ Compare Investitionsbank Berlin, Housing Market, 2020, p.44.

⁴ Compare Immowelt, Rent German Cities, no year, no page number.

⁵ Compare Klimpel, L., Expropriation, 2019, no page number; Kersting, S., Expropriation Debate, 2021, no page number.

⁶ Compare Investitionsbank Berlin, Housing Market Data, 2020, p. 9.

⁷ Compare Investitionsbank Berlin, Housing Market, 2020, p. 51.

⁸ Compare Investitionsbank Berlin, Housing Market, 2020, p. 28.

⁹ Compare Amt für Statistik Berlin-Brandenburg, Mikrozensus, 2020, no page number.

¹⁰ The value for 2018 is a forecast value.

¹¹ Compare Amt für Statistik Berlin-Brandenburg, National Accounts, no year, no page number.

¹² Compare Investitionsbank Berlin, Housing Market, 2020, p. 28 et seqq.

¹³ Compare Investitionsbank Berlin, Housing Market, 2020, p. 36; Amt für Statistik Berlin-Brandenburg, Building Permits Berlin, 2014, p. 12.

¹⁴ Values are rounded.

¹⁵ Compare Investitionsbank Berlin, Housing Market, 2020, p. 43 et seq.

¹⁶ Compare Amt für Statistik Berlin-Brandenburg, Buildings and Housing, 2020, no page number.

¹⁷ Compare Investitionsbank Berlin, Housing Market, 2020, p. 45 et seqq.

¹⁸ Compare BerlinOnline Stadtportal, Milieu Protection Area, no year, no page number.

¹⁹ Compare Investitionsbank Berlin, Housing Market, 2020, p. 64 et seqq.

²⁰ The expert list of representative rents is defined precisely in § 558d BGB.

²¹ The local comparative rent is defined precisely in § 558 (2) of the BGB.

²² Compare Investitionsbank Berlin, Housing Market, 2020, p. 69.

²³ Compare Investitionsbank Berlin, Housing Market, 2020, p. 75.

²⁴ The overall housing stock of 1,949,252 apartments minus 27,536 apartments in residential homes amounts to a housing stock of 1,921,716 apartments in 2018 considered for this analysis.

²⁵ Compare Investitionsbank Berlin, Housing Market, 2020, p. 75.