Economy Experts Criticise Landlord-Tenant Law Regulations


December 2018

In its latest annual expert opinion, the German Council of Economic Experts (SVR) has criticised the housing policy of Germany’s Federal Government. The five so-called “Economy Sages” analysed both the measures already passed and the ones planned, and found harsh words for some of the decisions made by Germany’s policymakers—the rent freeze being one example (source: The economy experts call rent caps a “limited therapy to combat symptoms” with harmful side effects. The expert opinion argues that the rent freeze hampers the efforts of flat hunters because the application of the regulatory instruments causes the supply of normal rental flats to contract. The experts’ analytic findings show that the rent freeze can discourage investors from committing themselves in housing construction, on the one hand, while encouraging landlords, on the other hand, to stop letting their condominiums and selling them to owner-occupiers instead.

Regulation will Not Solve the Underlying Problem

Despite the arguments fielded by the council of experts, the Federal Government remains committed to the rent freeze. The Grand Coalition forming the current government has no intention to rescind the instrument. On the contrary, it plans to tighten it further with its latest draft bill (source: The thing is, however, that the underlying problem, which is short supply, will in no way be addressed by measures like rent control, and the council of experts has said as much. As an obstacle to the necessary expansion of the housing supply, the survey identifies over-regulation, which increases construction costs, and long-winded permit procedures. The survey also touches upon the dwindling supply in building land, which the Federal Government intends to resolve by introducing a new property tax, “Grundsteuer C.” The Government intends to use this tax to mobilise development land and to curb speculations by imposing an extra tax on zoned land that is not being developed. However, the council of experts has pointed out that such measures would be fraught with “serious issues.” After all, reasons other than land speculation could conceivably keep landowners from developing their zoned properties, including regulatory hurdles, lengthy permit procedures and the lack of available contractors, for instance.

Real Estate Transfer Tax Reform Recommended

Another thing the expert opinion lambastes is the Government’s homeownership policy. The child tax credit for first-time home buyers that has already been introduced is marred with deadweight effects and benefits mostly those who would have been able to afford homeownership anyway. Its effectiveness in raising Germany’s homeownership rate is therefore minimal at best. It would make much more sense, in the eyes of the economy experts, to reform the real estate transfer tax which seriously drives up the incidental acquisition costs. They recommend a look at practices in other countries, such as the United Kingdom where a sliding-scale tax structure is used that depends on the amount of the purchase price. Also worth looking at is the Dutch system of exempting new buildings from the real estate transfer tax. A direct comparison between the Netherlands and the neighbouring German state of North Rhine-Westphalia returns a sobering result: The incidental acquisition costs when acquiring a property with a 250,000-euro price tag are four times higher in North Rhine-Westphalia than in the country next door. On the whole, the German Council of Economic Experts issued an extremely poor scorecard to Federal Government for its housing policy. Whether the Government will consider this reason enough for a policy shift, however, is highly doubtful.

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