Germany will bring in caps on rent rises in densely populated areas in the first half of next year, it was announced on Tuesday, in a government attempt to keep homes affordable for tenants on average incomes.

Under the rule change, landlords will only be able to raise rents by up to 10% above the local average for similar properties when taking on new tenants.

However, newly built properties and those that have undergone wholesale renovations will be excluded from the restriction, in order not to discourage investment in building projects.

“Renting has to remain affordable for those on average incomes,” said the German justice minister, Heiko Maas. “The cap will contribute towards that. Rent rises over 30% or 40% in concentrated areas are simply unacceptable.

“We are creating a fair balance between the interests of landlords and tenants. Those who invest money should in the future be able to continue earning money. But rental properties are more than just a commodity, they are the homes of people. Maximising profits cannot be the sole objective.”

Once the law has been passed, Germany’s 16 regions are to identify which specific areas will be affected by the rent-rise caps for a period of up to five years. Areas affected are expected to include large cities such as Berlin, Hamburg and Munich, as well as booming university towns such as Freiburg, Heidelberg and Tübingen.

In addition, estate agents’ fees will in future have to be paid by those who commissioned them – in most cases the landlord. In the past, agency fees in Germany have usually been paid by the tenant.

Germany’s tenants’ association welcomed the proposals, but said further steps were required to fix the national housing market. “We’ve been fighting for a rent cap for years, so we obviously welcome that there is finally a much-needed legal framework to stop tenants hiking up rents,” the association’s spokesman, Ulrich Ropertz, told the Guardian.

“But the cap is no magical formula, and we shouldn’t live under the illusion that it will lead to lower rents. The real problem at the heart of Germany’s housing crisis is a shortage of new properties. Until that issue is addressed, the cap will only be a short-term cure.”

Critics of the rent-rise cap said that it would above all benefit middle-class tenants, while those on lower incomes, who cannot afford average rents, would continue to struggle to find homes in the booming inner-city areas.