German Mortgage Market overview

Berlin’s rent cap is now active. How does it affect prospective homebuyers?

Amidst a fair deal of controversy, the rent price cap was approved by the Berlin Parliament on January 2020 and it’s been active since February 2020. What will change for homebuyers in the German capital?

 

February 2020 marks an important — and progressive — change for the 85% of Berliners who choose to rent in the city: the Mietendeckel, an active 5-year freeze on rentals in the whole of the German capital. The idea was first published in early 2019 by Eva Högel, a federal member of the Mitte council, and generally seen as a radical “socialist” idea that might not generate the expected results. 

 

What is the rent cap/Mietendeckel

The extreme reform will now freeze all rental prices in Berlin for the next 5 years. It covers all residential rents with the exception of some social housing apartments whose rent is already tightly controlled. There are more exceptions: properties built after 2014 are exempt, for example, and even with the Mietendeckel, landlords will still be able to increase their rents along with the inflation at 1.3% from 2022.

 

The newly enforced law not only prevents landlords on rising the rent of existing tenants, but it also introduces a maximum rent cap for new rental contracts, with a minimum of €3.92/sq m for older flats up to a maximum of €9.80/sq m. At the moment, the average rental price of a new contract is €10.34/sq m.

 

Tenants paying more than 120% of the capped amount will now be able to request a reduction in their rent — and that also applies to furnished apartments. Landlords that fail to follow the rent cap law might be fined up to €500,000.

 

In theory, the Mietendeckel proposes to protect tenants, develop a longer and healthier relationship between tenants and landlords, and not to mention it could reinforce the communal experience Berlin has long been known for. It’s a radical, progressive and highly idealistic law, and its likely results are very divisive. 

As a homebuyer, what does the rent cap mean?

There are a few expected outcomes for homebuyers as a direct result of the rent cap. Obviously, buying property for your own use it’s always a good idea, not to mention it’s cheaper long-term too. 

 

But what about buying a home in Berlin for investment purposes only?

 

It’s too early to tell how the rent cap will directly affect the prices of properties in Berlin, but here are a few of the possibilities:

Nothing will change, really

Yes, you’ve read that right. For investment purposes, the Berlin property market will still have a favourable price per square meter — and we are talking about a European capital in the heart of the continent, after all! Because the opportunities for rental income will become limited, the investment will depend on the purchase price. It’s also unclear if the rent cap will be extended after 2025, so even though it might feel contradictory, it shouldn’t stop prospective owners to have an optimist look on the property market – especially if we bear in mind that new buildings (from 2014 on) are completely exempt from the Berlin Rent Act.

Property prices might actually go down

If the rent cap indeed proves itself to scare off international property investors who believed rent prices could go up 5% a year (or more), well… Some might say that is actually good news. Should that scenario come forward and investors sell off their Berlin properties, the prices could go down — giving more people the chance to buy as the whole city would become more affordable. 

 

Let’s talk about being idealistic, right? This is surely an outcome that will benefit homebuyers for own use and investment reasons alike. 

There will be no properties left

What! Let’s talk about the glass-half-empty scenario. Given the recent scarcity of property supply, the slow pace of new building constructions, higher construction costs and land prices, it is natural for prospective homebuyers to find themselves staring into a bleak scenario where property prices could skyrocket once the competition would be higher than ever. Is it likely? Probably not. But it’s out there, just in case.

 

I still want to buy property in Berlin!

And why wouldn’t you? Now that you know a few possibilities the Berlin Rent Act might bring, you can start making your mind up – whether it is buying for own use or as an investment. Even though the Mietendeckel is a radical proposal, its effects are more likely to be moderate, and it’s worth remembering that it might only last for 5 years, after all. 

 

A European capital will remain so, let’s keep that in mind. If that still sounds daunting, remember that this law is only valid for Berlin – the rest of German cities remain independent from the Berlin Rent Act.

 

We at LoanLink are a mortgage broker based in Berlin focussing our consulting Expats/ foreign investors on their property purchase in Germany. 

Our LoanLink mortgage advisors are happy to answer any questions. Our goal is to help you find the best loan.

Got a question about the real estate valuation or home purchase process for non-German residents in Germany? Contact us!

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