Rent cap and regulation of the real estate market

PwC-Study 2021: Economic impacts of rent regulation on the residential real estate market

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Benjamin Schrödl
Partner at PwC Germany
Tel: +49 171 76 58-659

Spotlight: rent regulation

The demand for (affordable) housing exceeds supply in urban areas in Germany by far, which has caused rent and purchase prices to rise over the past years. Authorities have been trying to limit the rent increases through new regulatory measures such as the rent brake (“Mietpreisbremse”), the rent cap (“Mietendeckel”), and the building land mobilization act (“Baulandmobilisierungsgesetz”). The latter came into force in June 2021. The rent cap came into force in the beginning of 2020 and has been a controversial subject of debate. It was declared unconstitutional by the Federal Constitutional Court in April 2021. 

Which impacts did regulatory measures such as the rent cap have in the past and which consequences do they still have today? These questions are examined by the PwC study “Rent Cap & Co. – Economic Impacts of Rent Regulation on the Real Estate Market” (“Mietendeckel & Co. – Wirtschaftliche Auswirkungen von Mietregulierungen auf den Immobilienmarkt”) with a focus on Berlin.

“The rent cap has failed to achieve its important sociopolitical goal to create affordable housing, especially for low-income residents.”

Dr. Harald Heim,Partner at PwC Germany

The study at a glance

Increased competition for rental apartments and declining yields in Berlin

Berlin: The rent cap decreased the rent level on the already competitive housing market by 8 % on average, according to ImmoScout24. The strongest decreases have been experienced by wealthy districts (e.g., Charlottenburg-Wilmersdorf). Lower-income districts (e.g., Neukölln) have benefitted less.

The competition for existing rental apartments (constructed before 2014) has intensified as a result of the rent cap. The number of existing apartments available for rent has decreased by almost 60 % between September 2019 and 2020 while the total number of apartments available for rent (all construction years) has decreased by 41.5 %. Meanwhile, the other German A-cities have experienced an increase of approx. 35 %. With 140 applicants per rental apartment in 2020, Berlin witnessed by far the most competitive housing market compared to other German cities, followed by Cologne with 63 applicants.

Decreasing yields often result in unattractive letting scenarios, particularly for private owners

The price level for residential properties is 15-30 % higher than it could be justified by demographic and economic factors, according to the February 2021 monthly report of the German Central Bank. This partly results from the different growth rates of rent and purchase prices in Germany (e.g. 2 % vs. 7 % in 2020).

The rent cap has intensified this development by reducing the rent level and limiting rent increases while purchase price increases  are further driven by other factors such as the ongoing population growth in Berlin. As a result, the acquisition and subsequent letting of apartments often result in unattractive and sometimes even negative yields for private individuals.

Regulations inhibit energy-efficient modernisations

A variety of regulatory measures have been introduced in recent years in Germany. The rent cap (“Mietpreisbremse”) has been introduced in 2015 and tightened in 2020. The number of social conservation areas (“Soziale Erhaltungsgebiete” or “Milieuschutzgebiete”) has increased from 34 in 2016 to 64 in 2020 in Berlin. The regulation on the conversion of rental apartments into condominiums (“Umwandlungsverordnung”) from 2015 has been extended for five additional years in 2020. The rent cap (“Mietendeckel”) came into force in February 2020 and was declared unconstitutional in April 2021. In the same month, the building land mobilization act (“Baulandmobilisierungsgesetz”) came into force. The PwC study provides an overview of these regulatory measures and explains their economic impacts for the residential real estate market.

Berlin municipalities receive extended rights of first refusal

The building land mobilization act has expanded the right of first refusal for municipalities with the goal of meeting the housing demand across Germany. Municipalities do not have to enter into the sales and purchase agreement with the previously negotiated conditions but can choose to pay a different price, determined by a third-party appraiser.

Social conservation areas

Since 2010, the number of social conservation areas has been increasing in Berlin and other major cities. The number of social conservation areas in Berlin has increased from 18 in 2010 to 64 in 2020. Among other measures, these areas grant rights of first refusal to municipalities for real estate transactions.

Deviation of rent and purchase prices in Berlin’s periphery

Due to the limited supply of large family-friendly apartments in Berlin, residents continue to search for suitable living spaces in Berlin’s periphery in Brandenburg. The increased demand has driven the strong increase in purchase prices over the past 5 years in Berlin’s periphery. Since rent prices have been rising with a slower rate, both price levels have deviated from each other, resulting in decreasing yields too.

Rent regulation in other countries

Rent regulation has sometimes failed to achieve its goals in other countries too. The waiting time for rent-controlled apartments in Sweden is eleven years, on average. In Vienna, regulatory measures have created a complex and non-transparent residential market, often to the cost of low-income residents. In New York City, regulatory measures have contributed to substantive capital expenditure backlogs in some areas.

The methodology

The study provides an overview of increasing rental regulation and its economic impacts for the residential real estate market. The Berlin rent cap and the analysis of its consequences are the focus of the study. No primary data has been collected. 

The direct impacts analyze the influence of regulation on the valuation of real estate properties. The rent decrease in three locations with average to good markets is shown as an example of the impact of the Berlin rent cap. The influence on share prices is shown based on analyses of the PwC Real Estate Monitor.

Further information regarding the methodology is shown on page 5 of the study.

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Benjamin Schrödl

Benjamin Schrödl

Partner, PwC Germany

Tel: +49 30 2636-1331

Dr. Harald Heim

Dr. Harald Heim

Partner, PwC Germany

Tel: +49 30 2636-1354

Benjamin Germin

Benjamin Germin

Senior Manager Advisory Real Estate, PwC Germany