The proposed regulation of the mid-segment of the rental market: a curtailment of property rights?

Through the implementation of various measures from 1 January 2024, De Jonge aims to better protect mid-segment renters from extreme rents and safeguard the housing supply in the mid-segment of the rental market. The proposed measures have been strongly criticised by various groups. The main criticism is that the measures, considered both separately and together, constitute an excessive infringement of property rights. In other words: is the proposed regulation of the mid-segment of the rental market a curtailment of property rights?

In the following, I first briefly discuss De Jonge’s measures and then the criticisms levelled at them.

Increase in the rent-controlled ceiling

The first measure concerns the increase of the rent-controlled ceiling from 142 Housing Valuation System points (a rent of €763.47) to 187 Housing Valuation System points (a subsequent rent of approximately €1,100). The rent-controlled ceiling determines which houses fall in the regulated sector and which in the non-subsidised sector. If a house falls in the regulated sector, this also means that tenants can turn to the Rent Tribunal if they have a dispute with their landlord.

The increase in the rent-controlled ceiling ensures that the mid-segment of the rental market will also be part of the regulated sector. The increase will only apply to new rental agreements concluded on or after 1 January 2024.

Imposing a cap on rent increases

The next measure concerns capping rent increases in the mid-segment of the rental market segment. Earlier this year, it was announced that the maximum permissible rent price increase in the non-subsidised sector – previously calculated in accordance with the ‘inflation + 1%’ formula – will be capped at ‘wage growth + 1%’ from 1 January 2023. This way, the price increase is calculated based on the average Collective Labour Agreement wage index figure, instead of the Consumer Price Index (CPI) figure. This is due to the extreme inflation in recent times. The government wants to prevent rents from rising faster than the wages of mid-sector tenants.

Regarding the mid-segment of the rental market, De Jonge announced that rent increases will be capped at ‘wage growth + 0.5%’ from 1 January 2024. The capping applies to both current and new rental mid-sector rental agreements.

Adjustment of the scoring of the Housing Valuation System

It has also been announced that the scoring system of the Housing Valuation System (Woning Waarderingsstelsel, WWS) will be modernised. The Housing Valuation System determines the permissible rent of a property based its features. There has been criticism of the Housing Valuation System for some time. It is said to be outdated and does not sufficiently take into account certain features of a property, such as the facilities in the immediate vicinity. De Jonge therefore considered modernisation appropriate. The adjustments are as follows:

• Energy efficiency: The energy efficiency of a home will carry more weight. Houses with energy label A or higher will receive more points than on the basis of the current Housing Valuation System. In addition, houses with an energy label E or lower will receive minus points. This rewards sustainability and punishes the failure to be sustainable. De Jonge hopes to encourage landlords to make their rental properties more sustainable.
• Outdoor space: In addition, a house receives more points if it has a large outdoor space, such as a roof terrace or garden.
• Increase in the cap for the purposes of the Valuation of Immovable Property Act (Wet waardering onroerende zaken, WOZ-cap): The cap for the purposes of the Valuation of Immovable Property Act of the Housing Valuation System will also rise. This cap stipulates that when a house is awarded 142 Housing Valuation System points or more, a test will be carried out to see what percentage of that number of points was achieved by the house’s value for the purposes of the Valuation of Immovable Property Act. If that percentage is above 33%, then the number of points is reduced such that the percentage is reduced to 33%. This reduces the number of points of the house and therefore the permissible rent. This prevents houses from falling into the non-subsidised sector due to their high value for the purposes of the Valuation of Immovable Property Act. The cap for the purposes of the Valuation of Immovable Property Act will be raised to 187 Housing Valuation System points.

Housing Valuation System becomes mandatory

Last but not least, the Housing Valuation System will become mandatory from 1 January 2024. This requires landlords to comply with the Housing Valuation System, even if they rent out a house in the non-subsidised sector. Landlords risk a fine if they charge rent that is too high (read: non-subsidised sector) for a house that, based on its quality, should be a mid-sector or even a social sector house. This increases the indirect reach of regulation.

The amount of the fine, the method of enforcement and the consequences are not yet known.

Criticism of the proposed regulation of the mid-segment of the rental market

As mentioned above, the proposed measures have been strongly criticised. Both the proposed measures and the measures already in place. I will briefly discuss some of these criticisms.

Reduced housing supply

Even before the announcement of the measures on the proposed regulation of the mid-segment of the rental market, four professors had already studied the impact of this regulation. Their studies have shown that the measures are unlikely to have the intended effect of maintaining sufficient housing stock in the mid-segment of the rental market.

The reason is that regulation will result in lower rents in the mid-segment of the rental market and therefore reduced returns for landlords/developers. In addition, regulation expands the reach of the Rent Commission. This makes it a lot less attractive for landlords/developers to continue renting out their existing houses in the mid-segment of the rental market or to build new houses in the mid-segment of the rental market. For some, this will even become impossible. They will be forced to sell (dishoarding) their rental properties or forgo new construction. All in all, the measures will not result in maintaining the housing supply in the mid-segment of the rental market, but instead will result in reducing the supply.

Points system of the Housing Valuation System is unrealistic

With regard to the modification of the Housing Valuation System, another criticism is that it does not sufficiently take into account the fact that landlords/developers do not always have the ability to make their rental properties more sustainable. Or at least to such an extent that they can recoup their investment. After all, making homes more sustainable can be an expensive undertaking and, in older homes, often impossible. Moreover, monuments are subject to strict restrictions on preservation (double glazing is not allowed), as are inner-city houses (altering facades and installing solar panels are not allowed).

The cap for the purposes of the Valuation of Immovable Property Act was criticised by the Council of State (Raad van State) even before its introduction in 2021. In its opinion, it indicates that the cap for the purposes of the Valuation of Immovable Property Act is a measure that reduces the landlord/developer’s rate of return, effectively infringing on its property rights. It questioned the extent to which the cap will indeed protect the housing stock in the mid-segment of the rental market, as it is likely that landlords/developers will, on the contrary, sell their mid-segment rental homes, rent them out on a room-by-room basis or rent them out as a ‘short stay’ rather than as mid-segment homes. In addition, the cap would make new construction in the mid-segment of the rental market unattractive (see also the previous criticism on this point). These considerations of the Council of State are still relevant today.

Property division prohibition, Box 3 bridging scheme and 10.4% transfer tax

Finally, the proposed measures should also be considered in the light of the measures already in place, such as the property division prohibition and tax measures.

Since 2019, a prohibition on property division has stipulated that houses cannot be split into two or more dwellings in almost all of The Hague. Again, this measure was intended to safeguard the housing stock. In practice, however, it appears that the municipality adheres firmly to the property division prohibition, even where customisation might be a better option. For example, when splitting higher-end houses or houses that were previously merged. For further details on the property division prohibition and its implications, please refer to this article [MC].

There are also fiscal measures in place that affect the mid-segment of the rental market, such as the Box 3 bridging scheme and the increase in transfer tax. The Box 3 bridging scheme stipulates that the Box 3 tax will no longer be levied on a notional investment return but on the actual return. Transfer tax has also been increased for investors again from 8% to 10.4% from 1 January 2023: it was previously 2%.

These prevailing and proposed measures are making it increasingly difficult for investors/developers to achieve sufficient returns to be able and willing to maintain them in the long term.

Infringement of property rights?

I will conclude this article with a reference to Article 1 EP ECHR. In fact, the main criticism of the proposed measures is that they excessively infringe on the undisturbed property rights of landlords/developers under Article 1 EP ECHR.

Similar comments have been heard for some time about the Housing Valuation System. The infringement is considered to be too intrusive, as it would effectively allow the government to determine the price at which a landlord can rent out its property and thus the return it can earn from it. A similar criticism was expressed by the Council of State regarding the introduction of the cap for the purposes of the Valuation of Immovable Property Act. Through the cap, the government also determines (read: restricts) the landlord’s return, which infringes on the ownership rights of landlords/developers. The Council of State indicated that such regulation by the government is allowed only if it serves a public interest and there is a reasonable balance between the infringement of the property rights and the public interest served by it. [1]

It is clear that the announced measures constitute a similar infringement of the property rights of landlords/developers and that they serve a general purpose (i.e. ensuring sufficient housing supply in the mid-segment of the rental market). Whether there is a reasonable balance, however, remains to be seen. All the more so since several restrictive measures are already in place, no end date has been set for the announced measures and there is no evidence that these measures will actually achieve their intended purpose.

[1] Cf. HR 24 December 2021, ECLI:NL:HR:2021:1963 on the infringement of the right to undisturbed property ownership under Article 1 EP ECHR.

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