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Controlling rents, ensuring supply

Brian Cooney writes: With the current crisis in the Irish rental market manifesting itself both in a lack of supply and spiralling rents (now apparently just below pre-crisis levels in Dublin), there has been much talk about the German system of rent control.  

While rent controls in Germany are primarily restricted to larger towns and cities, the basic approach is set out below. When first renting, the tenant negotiates the initial rent with the landlord – usually market-related. Once this has been agreed, and as long as the tenant remains in the property, all future rent rises (no increases are possible in first twelve months) are subject to two key controls:

• Any rent increase must reflect the average rents (Mietspiegel literally “rent mirror”) in the locality for the type of apartment (size, location, fit-out, build year) under discussion. If the apartment is of above average quality a higher rent increase can be sought. Poorer quality apartments will be subject to lower rent increases. 

• The rent cannot increase, in total, by more than twenty per cent over a three-year period.

The Mietspiegel for a district is calculated, usually every two years, by the local authority, working in tandem with landlord and tenant associations.

From a tenant’s perspective, the benefits are clear. Rent increases are controlled, which allows for long-term tenure and planning. When coupled with the right of tenants to stay in their property, even if the landlord wishes to sell, this also makes the relationship with the landlord much more equal than it is in Ireland.

From a landlord’s point of view, there are also important advantages. By providing rent security, the German arrangement encourages long-term tenancies, with tenants having a greater sense that the property is their home, which usually results in a better-maintained asset. Further, by encouraging long-term tenancies, rent control has the potential to significantly reduce vacancy times in the apartment. (A ten per cent rent increase loses much of its value if the tenant leaves and the landlord takes six to eight weeks to find a new (and unproven) tenant, with no rent coming in during this period and with all the fees and time invested in identifying new tenants.) The longer-term approach also make the sector more attractive to professional investors. Pension funds, for example, need safe investments generating reasonable yields to ensure pensions can be paid. Such investors in turn tend to be more professional in their dealings with tenants and in the maintenance of the properties. 

What are the disadvantages? If such controls reduced the number of properties being made available for rent this would be a significant downside for the tenant. However, as the German example indicates, this does not appear to be a consequence. For the landlord, the inability to raise rents willy-nilly is, clearly, a disadvantage. They are left unable to fully take advantage of spikes in demand for apartments. (However, where a tenant leaves an apartment, the new tenant will have to pay the market rate, allowing landlords to play catch-up if the rent has fallen behind the market.)

From a societal point of view, the German approach treats residential property as primarily a social asset, which ensures its citizens are properly housed. While recognising the important need for the private investor to generate sufficient return on the investment both to make existing properties worth maintaining and to justify future supply of new properties, it sets a limit on the potential return to ensure its citizens’ needs are properly protected. It seems to work.

20/12/2015