^NewsInternational Rental Insights: Germany

Introduction

Inspired by a Brookings series reviewing rental housing globally (link), we’re creating a series looking more closely at what we can learn from rental systems and regulation around the world. The series will focus on rental regulation, but also touch on the housing sector in general. While this series will primarily focus on how rental tenancies are regulated and the different forms tenancy structures can take, we believe the most critical factors for improving housing outcomes is an abundant supply of housing, facilitated by a more elastic housing market, efficient regulation, and market-based resource allocation.

German Rental Housing

Rental and Housing Market Overview

Germany has a predominantly rental-based housing system, with the majority of residents renting rather than owning. Renters tend to be less affluent on average, and most housing is in multifamily buildings. Ownership of rental stock is largely private, with around 60% held by individual landlords, 20% by real estate firms, and the remaining 20% by co-ops and public entities (15% and 5%, respectively) (source). The majority of rental is in the private market: 92%, with different social housing structures forming the remaining 8% (source).

Tenancy Law and Lease Structures

Lease terms can be either open-ended or fixed, with open-ended leases being the predominant type. The standard notice period for both tenants and landlords is three months, but longer tenancies trigger extended notice requirements for landlords—six months if the tenant has lived there 5–8 years, and nine months if longer. Landlords can terminate for personal use, renovation/redevelopment, or if an employee of the landlords requires usage of the property. However, holiday homes and dwellings inhabited by the landlord have more flexibility for landlords use. For tenant non-performance such as non-payment of rent, there requires 2 months of arrears, though evictions can take up to six months to complete (source). Other grounds for termination include repeated late payments, unauthorized subletting, and disruptive conduct. Protections are broad, including provisions preventing eviction while a tenant is seriously ill.

Rent Regulation and Increases

Rental agreements may include structured rent increases, either by fixed schedule or indexed to inflation (e.g., CPI). Landlords may also apply for increases to match local market rents, provided they can justify the adjustment with comparable data. Even in such cases, rent increases are capped at once per year and cannot exceed 20% over a three-year period, although some regions this number is 15%. Rents cannot be increased within the first 12 months of a tenancy, and in some regions, new rents cannot exceed the local average by more than 10% (source; study). There is also the ability to increase rents due to renovation/modernization, and this capped to 11% of costs spent.

Deposits and Commencing a Tenancy

Security deposits can be up to three months’ rent, with interest accruing to the tenant. The deposit must be held in a separate account for protection, and tenants are allowed to pay it in three monthly installments (legal reference).

Maintenance, Operating Costs, and Tenant Rights

Landlords are responsible for timely maintenance. If defects are not addressed, tenants can request rent reductions. Alterations to the unit typically require landlord approval and, unless otherwise agreed, tenants are expected to return the unit to its original condition at the end of the lease.

Operating costs—referred to as Nebenkosten—can be passed on to tenants and often resemble those in commercial leases. These may include property tax, insurance, utilities (water, heat, electricity), landscaping, pest control, and shared building system maintenance. Costs related to administration or wear-and-tear repairs are excluded (legal text). Average operating costs are around €6.40 per m² per month (source; guide)

Housing Supply Conditions:

Vacancy rates in major urban areas like Berlin, Munich, and Frankfurt are below 1% (source). Over the past 10 years, Germany’s population has grown by 4 million, while the housing stock remains short by an estimated 400,000 units. Construction activity has slowed, due in part to increased costs and ESG compliance, with output roughly 45% below the levels seen between 1998 and 2007.

The local nature of planning in Germany plays a significant role. Since municipalities receive funding based on population, there is a fiscal incentive to support population growth. This has often translated into higher housing approvals per capita than in countries with more centralized systems. A detailed review of this dynamic is available via Sightline Institute. While housing supply has increased 2010-2020, starts have dropped off significantly from 2022 after interest rates increased substantially and the housing market price corrected (reuters). This is a challenge as Germany continues to absorb large numbers refugee and Ukrainians fleeing conflict. 

Affordability pressures have grown. On average, rent-to-income ratios are around 27% (source). Rent control policies—such as Berlin’s rent freeze—have been introduced with mixed effects. While they provided short-term cost relief, they also contributed to distortions such as reduced supply and informal “key money” practices (study). The rental market is also not fully digitized, creating friction—especially for newcomers and foreign residents (DW article).

Comparison of German and BC tenancy law

• Rent control: German rent control allow more flexibility and adaptability to market conditions through allowing both negotiated rents via inflation index or stepped rents, but also allows lessors to increase rents to market provided that the process is gradual – that is not more than 20% of increase over 3 years. BC rent control used to be established at inflation + 2% but now is capped at inflation with the potential of political intervention when inflation is high.
• Deposits: Germany allows deposits of up to 3 months rent versus the maximum of 1/2 months rent + another 1/2 for pets in BC. Allowing larger deposits helps lessors mitigate the risk of tenants defaulting. As in many other European countries there exists deposit insurance schemes to allow tenants to be sure that the deposit funds are secure. This offsets the requirement that eviction for arrears can only been enforced if the tenant is at least 2 months behind on rent.
• Notice periods and lease termination: The standard notice period for termination of a lease is 3 months for both the lessor and the lessee. While this is similar to BC’s 3-4 month requirement for landlord’s use or redevelopment, it varies in that tenants in BC only need to give 1 month notice. For German notices, the notice period required also increases the longer the lease goes on for. Furthermore, lessors and lessees are generally free to contract that the lessor or lessee cannot utilize the lease termination clause within some initial lease term. Meaning one can structure a perpetual lease to resemble a fixed initial term followed by a month to month lease. Furthermore, valid terminations of the lease by the landlord does not require compensation to the tenant.
• Term of rental: While the large majority of tenancies in Germany are open ended and perpetual, German law does allowed fixed term leases where there exists a specific reason for termination of the lease at the end of the fixed term, this includes if the property is to be redeveloped or if the lessor or family is to move in.
• Operating cost sharing flexibility: Perhaps the biggest difference between German and BC tenancy law is that German residential leases can operate like net commercial leases whereby reasonable operating costs can be borne by the tenant rather than the landlord. This is something that can be negotiated and contracted into.

In summary we find German tenancy law to be more flexible and symmetric in its treatment of residential tenancies. It allows greater freedom to contract specific provisions and align incentives. Whereas we find BC tenancy law has been modified over the past few years in the spirit of tenant protections but has time and again introduced unintended consequences and incentives which then required further measures. For example, strict rent control incentivized tenant turnover which then required restrictions on landlords use of the property, increased notice timelines, and strict processes, penalties and compensation to tenants. All throughout this process, the gap between in-place and market rents have grown substantially, distorting allocation of housing and incentives. Germany seems to achieve good rental housing outcomes by allowing markets to function, and having tenancy laws that protect tenants and are fair to landlords. They also provide means tested direct renter subsidies ‘Wohngeld’ to almost 600,000 households of 200-400 euro per month which allows more freedom of movement and better allocation of housing resources.

Disclosure/Disclaimer:
This blog is published by Habit8 Property Management, licensed property managers in British Columbia. The information provided is for general informational purposes only and does not constitute legal, financial, tax, or other professional advice. While we strive to ensure accuracy, the content reflects our understanding as of the date of publication and may not account for future changes in laws, regulations, or market conditions. You should consult appropriate professionals before making any decisions based on this content.