The index rent offers protection against renovation-related rent increases, as these are excluded in such contracts.
(Photo: Moment/Getty Images)
“Index rents are so insanely unfair. The rent in our building has increased by ten percent. No salary automatically goes up ten percent. Why rental income?” wrote publicist Marina Weisband on Twitter. More than 8,000 people have “liked” the tweet, which can be taken as approval. This includes Achim Truger, member of the Advisory Council for the assessment of overall economic development. In the case of an index rent, it is contractually agreed that the rent will increase in accordance with the price index for the cost of living.
Aside from the fact that maintenance and management costs rise with inflation, this criticism forgets that index rents have been good for tenants for years. Thanks to low inflation, rents often rose much more slowly than would have been expected given the tight housing market.
At the same time, the index rent offers protection against renovation-related rent increases, as these are excluded in such contracts. The temporary surge in inflation is only catching up on what would have happened before with normal rental contracts.
This does not prevent politicians from considering further interventions in a market that is already heavily regulated. Green party leader Katharina Dröge called for existing index leases to be capped. That would be another market intervention, which should ensure that the rent remains affordable after the rental price brake and (for the time being failed) rent cap.
It is right to campaign for affordable rents, but political activism is unnecessary and wrong. It is harmful for at least four reasons:
disenfranchisement of citizens
On the one hand, such an intervention reinforces the already growing attitude that the state is called upon to subsequently change the rules in every area of life if a relevant group of voters is affected.
This leads to an incapacitation of the citizens. Instead of thoroughly examining what you agree to by contract, you rely on the state doing it for you. An attitude that shakes the very foundations of the market economy.
uncertainty for investors
On the other hand, political action increases uncertainty for investors. According to the will of the politicians, these should urgently create new living space. But who still does that when calculated returns adjusted for inflation can be rendered invalid at any time with the stroke of a political pen? The effect of the discussion about rent caps and expropriation on the housing market and the consequences for construction activity can be viewed in Berlin.
distribution in the housing market
Another result of political interventions in the housing market: it is increasingly becoming a market in favor of those who already have a home and at the expense of those who are looking for a home. High-earning tenants rent more cheaply than without a rent control, older people stay in apartments that are too large because the move does not pay off. As a result, the supply drops further.
Interventions have a negative effect on wealth distribution
The interventions also have a negative effect on wealth distribution. According to the Bundesbank, the rate of home ownership in Germany is lower than in any other country in the euro zone, while wealth inequality is extremely high. Both are closely related.
A major reason: the regulation pushes rents below market level and reduces the incentive to buy property. This is exacerbated by the fact that access to social housing is by no means limited to those on the lowest incomes.
Instead of intervening more and more in a populist manner and thereby exacerbating the problems, politicians should stop preventing construction and making it more expensive, as is currently the case Berlin is the order of the day. At the same time, one should learn from other countries.
A study based on data from the European Central Bank (ECB) shows that the possibility of tax deducting mortgage interest for owner-occupied property and making direct transfers dependent on housing costs to low-income households instead of building social housing increases the welfare of all households.
>> Read here: Countries are demanding price containment for index rents
Abolition of real estate transfer tax for owner-occupied property and facilitating the conversion of rental apartments into condominiums with financial support for tenant purchases should also be examined. It is high time that politicians in the housing market – and not only there – effectively focused on those who really need it.
Daniel Stelter is the founder of the discussion forum beyond the obvious, which specializes in strategy and macroeconomics, as well as a management consultant and author. Every Sunday his podcast goes online at www.think-bto.com.
(Photo: Robert Recker/ Berlin)
Daniel Stelter is the founder of the discussion forum beyond the obvious, which specializes in strategy and macroeconomics, as well as a management consultant and author. Every Sunday his podcast goes online at www.think-bto.com.
More: Vonovia discontinues all new construction projects.