Capital Language Solutions | Grand Coalition 2.0: Tackling the housing crisis

Grand Coalition 2.0: Tackling the housing crisis

Almost six months will have passed between Germany’s parliamentary elections on 24.09.2017 and the results of the SPD’s members’ poll on 04.03.2018 – six long months that have included the collapse of talks to form a Jamaica coalition (between the CDU/CSU, the liberal FDP and the Greens) and a complete U-turn from the SPD, which quickly abandoned its opposition to another Grand Coalition (GroKo). Now, with the potential GroKo partners agreed on their major policies, it is up to the SDP’s rank and file members to either give their blessing or block a Grand Coalition 2.0. While Angela Merkel’s CDU/CSU waits for the SPD’s decision, we thought we’d take a closer look at the housing policies lined up for the next four years.


Rental Price Brake (Mietpreisbremse)

Introduced by the last GroKo, this flawed attempt to control rental price inflation was always ill-conceived, had too many exceptions and failed to do what its proponents hoped. Rather than allowing the legislation to lapse in 2020 as many within the real estate industry had hoped, the potential coalition partners have decided to review the Mietpreisbremse this year, with the aim of increasing rental market transparency.

Germany’s approach to rent control is inherently complex: First, calculate “local comparable rents” based on official rent indexes (i.e. set benchmarks for rental apartments based on their size, age and standard). Second, in the case of new tenancies, stop landlords from charging rents that are more than 10% higher than these benchmarks. If a previous tenant’s rent was already above this level, landlords are allowed to continue charging the same rent until the market catches up, so there is no pressure on landlords to reduce existing rents. Newbuild apartments are not subject to the Mietpreisbremse, while exceptions also exist for apartments that have been extensively renovated.

In future, landlords will have to disclose the rents paid by previous tenants to their new tenants and it will be easier for tenants to take their landlords to court if they think they are being charged too much rent. However, the exceptions for newbuilds and extensively renovated apartments remain, and there will still be no fixed penalties for landlords who violate the Mietpreisbremse’s limits.


Passing renovation costs on to tenants

If the coalition does assume office, landlords in neighbourhoods with housing shortages will only be able to pass on 8% of renovation costs to tenants each year, instead of the current 11%. At the same time, landlords will not be allowed to increase rents by more than EUR 3.00/sqm for six years after a renovation. The cap on the renovation costs that landlords can pass on to tenants is viewed by many commentators as a classic compromise – the CDU/CSU wanted to reduce the annual amount to 10%, whereas the SPD favoured a 5% limit. In any case, the partners have abandoned any attempt to limit landlords to only passing their costs on to tenants until the renovation costs have been recouped.


Help-to-buy/build for families

In order to increase homeownership rates among families with children, the government will pay a subsidy of EUR 1,200 per child per year to first-time buyers – for ten years. However, the payments will only go to families with a maximum taxable household income of less than EUR 75,000, plus an extra allowance of EUR 15,000 per child, i.e. a taxable household income of EUR 105,000 for a family with two childen. This help-to-buy/build scheme matches the proposals made by the CDU/CSU during last year’s election campaign.


Real Estate Transfer Tax

Changes to Germany’s real estate transfer tax system are another measure designed to promote homeownership and family asset building. Any changes are no more than proposals for the time being, but could see the introduction of tax free allowances for families either buying property for the first time, or buying a plot of land to build their first home. The new government, if it does come into power, will also consider a scheme to guarantee owner-occupier families’ mortgages via the KfW bank.


Social housing

The new federal government has agreed to extend its funding for the construction of social housing beyond 2019 and has approved an additional EUR 2 billion per year in 2020 and 2021. This was a key SPD demand, although the partners have not yet specified how and where the money will actually be spent. If the traditional distribution formula is applied, Berlin’s Senate could be in line for an extra EUR 110 to EUR 120 million. That would be enough to pay for roughly 1,300 units in social housing.


Private housing development

The CDU/CSU and SPD have agreed on a number of tax incentives designed to encourage the development of “affordable” housing. The government has set itself a target of 1.5 million new housing units within the next four years, although this ambitious goal combines both state-funded and privately financed housing developments. The CDU/CSU’s fingerprints are all over the measures to support private developers, while the SPD has successfully included cooperatives, municipal and church housing associations and not-for-profit organisations in the new schemes.


Rent indexes

In order to guarantee more legal security, there will be new minimum standards for regional rent indexes. At the same time, the reference period used to calculate rent indexes will be reviewed. Currently, rent indexes are compiled using rental data from the previous four years, although there have been calls for this to be extended to cover a longer period. In effect, the longer the reference period, the lower the rent index value and, as a result, the lower the local comparable rent that is the basis for rental increases permitted under the Mietpreisbremse.


Property tax

In order to stamp down on land speculation and encourage the development of more undeveloped land, the coalition partners have agreed to give municipalities the power to introduce a higher rate of property tax on undeveloped land that is ready for development.


Share deals

Having set their sights on developing an “effective and legally watertight regulation to curtail improper tax structures” that use share deals to minimise real estate transfer tax assessments. Depending on whose figures you use, between 20% and 60% of real estate deals in Germany involve the purchase of shares in a property owning company, rather than the direct purchase of the real estate asset itself. A number of reforms are being discussed, although this is against the background of real estate transfer tax receipts doubling over the last six years.

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