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Fact Check: Will the new rent and lease law limit excessive tendencies?

Fact Check: Will the new rent and lease law limit excessive tendencies? - Featured image

Author(s): RTL Lëtzebuerg

© Romolo Tavani / Shutterstock – Edited by RTL Grafik

The new housing law has recently been at the centre of discussion. What could change and will the new law be able to prevent excessive tendencies?

In the bill’s official presentation, Minister for Housing Henri Kox lists a “better protection of tenants” as the first goal of the new housing law. In a recent interview with our colleagues from RTL Radio, Kox specified that the government wants to allow the market to evolve while also preventing any excessive tendencies.

The new rent and lease law still has to be approved by the Chamber of Deputies and is thus not in force yet. But what could change if the bill is approved as it is right now?

Could it actually prevent “excessive tendencies” on the market?

Below are a few examples to make the comparison easier.

In these examples, the invested capital includes the fees that arise when a purchase is made, in order to keep the examples clear. Square metres are deliberately not given because they do not play a role in the current and new text for calculating rent prices. The calculations have been made using a series of spreadsheets provided by the Ministry of Housing. You can download the spreadsheets  here and here.

  • Example 1: A flat which was bought in 1970 for the equivalent of €35,000 and never renovated.

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  • Example 2: A house that was bought in 2000 for €400,000 and has never been renovated.

  • Example 3: A flat that was bought in 2022 for €850,000.

These three examples have been deliberately simplified, but they demonstrate how Draft Bill 7642 could affect rents.

According to an explanatory note from the Ministry of Housing, the coefficients in the new law have been changed to take into consideration the evolution of the prices of houses purchased a long time ago:

"The main innovation in the bill in terms of determining revalued invested capital concerns, in particular, the revaluation coefficients that the owner must use, which have been updated to better account for the evolution of prices for properties acquired several years or even decades ago."

Example 1 (1970 flat) effectively shows that the maximum rent that the landlord is allowed to charge under the current law, i.e., €483.47, is extremely low.

This is true regardless of the situation or size of the dwelling (which plays no role in either the current or the new law).

As a result, the Ministry of Housing's conclusion that the coefficients needed to be adjusted to avoid downward excesses is confirmed. The new law allows the owner of the 1970's flat that has never been renovated and is in a poor energy class to charge a maximum monthly rent of €1,420.

In example 2 (house from 2000), the maximum rent rises from €2,256 to €3,858 under the new law.

The average rent for a house in 2020 was €2,900. This means that if a rent of €3,900 was charged in 2022, an extremely high increase of nearly 34.5% would occur. However, it must be borne in mind that the €2,900 rent in 2020 is an average.

€3,900 for a house that is more than 20 years old and has never been renovated is legal, but it is not required.

In example 3, the monthly rent drops from €3,542 to €2,479. Since there is no revaluation of capital invested in new acquisitions, it does in fact make a difference whether 5% or 3.5% of the same amount is used to calculate the ceiling.

The coefficients for the new bill were developed by the Luxembourg Institute of Socio-Economic Research (LISER) at the request of the Ministry of Housing.

Will the new law prevent 'excessive tendencies'?

Through the examples, we can see that the new law would primarily prevent downward excesses in ordinary housing. In terms of upward excesses, the law intervenes most significantly regarding rents charged for a single room.

The total rent for a flat or house may not exceed the new cap. If the 1970 flat (example 1) has three bedrooms, they can no longer be rented at €800 per bedroom because the total would be €2,400, which is more than the legal limit of €1,420.

The same 3.5% and 3% ceilings apply to furnished accommodation and rooms. However, the landlord may request a "rent supplement," which is calculated based on the amount invested in the furniture. More information can be found here in French. 

As seen in Example 3, the new law has a significant impact on new acquisitions. Under the new law, a person who buys a residence may charge less rent than under the old regulation. The rent is effectively reduced in this case.

Criticism and open questions

There may be an imbalance because the rent and lease law does not take into consideration the situation and size of a dwelling, neither in its current version nor in the adapted version currently in the legislative process.

What matters is the landlord's investment, which must be maximised, not what the tenant pays in terms of living space or rent situation.

If the landlord made a bad deal and paid too much, this can be passed on to the tenant.

Under the new law, those who buy new may be much worse off than landlords who have bought their property a long time ago.

In this case, the rent may increase in comparison to the current law, as illustrated in examples 1 and 2.

Furthermore, under the new law, there may be significant differences in the value of two similar flats in the same building depending on when they were purchased.

If a flat from 2002 with energy class F, for example, cost €200,000 in that year, the rent can be as high as €1,500. Whereas a similar flat with the same energy class bought in 2020 for €800,000 could be rented for up to €2,224.

Tenants will benefit from more transparency, because under the new law, the capital invested must be specified in the contract. But in general, due to the new revaluation coefficients for old houses and flats, no decrease in rents is to be expected. Rather, as illustrated in examples 1 and 2, the opposite will be the case.

Finally, while the law establishes a price ceiling, the market still determines the price. This means that, despite the new law and the legal possibility, rents will not necessarily increase, if demand does not follow.

As far as the protection of tenants is concerned, the question remains to what extent they are protected by the new bill, if rental prices are not significantly contained.

It should also be noted that the majority of homes in the rental market are properties that have been purchased a long time ago, which, as previously demonstrated, are not restricted by the law.

The incentive for new investments, which must still be financed at present, would be reduced.

And acquisitions, often already paid off, or inherited dwellings would benefit from the new law, as rents could increase from a legal point of view.


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Originally published here.