Hamburg Lectures on Law and EconomicsFailing to Protect the Tenant - Major Capital Improvements and Consequnetial Rent IncresesProf. Georg von Wangenheim, Universität Kassel, 18:15–19:45, Room 1083a (VMP 5)
16. November 2016
Prof. Georg von Wangenheim, Universität Kassel, 18:15–19:45, Room 1083a (VMP 5)
Abstract
Residential rent control in Germany severely restricts landlords from increasing sitting tenants' rents. One exception is that following modernization, rents may be increased up to a fraction of modernization costs. In an effort to alleviate the financial burden of modernizations on tenants, the German government intends to reduce this fraction. We develop a formal microeconomic model to study the effects of this policy. We start with tenants who would never leave the apartment under usual rent control but then extend the model to a positive base rate of tenants moving to other apartments. With the basic model, we get unambiguous results. Reducing the fraction of modernization costs to be added to the rent will induce fewer but more extensive instances of modernization. This results in higher rent increases for tenants in buildings undergoing modernization and more frequent displacement of weak incumbent tenants. The intended reform will therefore fail in achieving its desired effects in the basic model. With a positive base rate of moving, the result persists only under certain conditions, in particular, if incumbent and potential new tenants are not too different. We compare the German rules to those of other jurisdictions to find that many of them are more effecting in achieving the goals of the German reform.