The deal, expected to come into force in the first half of 2015, will forbid landlords from setting rent more than 10 percent higher than the average for the area when a new tenant moves in.
“Rents have to remain affordable for people on normal wages,” Justice Minister Heiko Maas said, announcing the agreement. “The cap on rent rises will contribute to that.”
The rent rise cap will only affect certain areas with a “pressurized” housing market. Each of Germany's 16 states will designate areas where they want to implement a rent rise cap for up to five years.
New-build homes will be exempt from the system as the government does not want to discourage investors from funding new construction projects. The first tenancy after a complete renovation of a property will also be exempt.
In welcome news for tenants, the new law will also change how estate agents are paid, with the landlord picking up the estate agent bill in future, rather than tenants as has been the case until now.
The Christian Democratic Union (CDU) and Social Democrats (SPD) have until now disagreed on a three main points: whether the law will expire after five years or allow states to prolong rate caps, whether the new build exemption continues after the first tenancy, and how average local prices will be calculated.
A spokesman for the Berlin Renters' Association (BMV) was sceptical of the announcement that the coalition parties had resolved their differences.
“I think the parties, the SPD and CDU can't have achieved a result,” he told The Local. “You'd have to draft a new law on how the rent index is calculated, and that would definitely take longer."