Berlin’s recently introduced rent control policy is Germany’s single most stringent rent regulation tool. The law prohibits any rental increases for a period of five years. In the case of new rentals, the rent a landlord is allowed to charge is determined by fixed reference values based on the age and fittings of the unit in question.
From November 2020 onwards, the law even envisages rental reductions if rentals exceed the fixed reference values by more than 20 percent.
Strong concerns have been raised regarding the constitutionality of Berlin’s rent control policy, and in response, the parliamentary groups of the liberal FDP and the Christian-conservative CDU/CSU have petitioned the Federal Constitutional Court in Karlsruhe to conduct an abstract judicial review.
However, a ruling is only expected in the first half of 2021. Berlin’s former senator for urban development, Katrin Lompscher, has already advised Berlin’s tenants to put aside any rental savings until the constitutionality of the law has been confirmed.
Independent of whether or not the rent control policy is lawful, however, economists are unanimous in their assessment that it will not solve the fundamental problem of the Berlin housing market. Rental trends in Berlin, like elsewhere, are determined by supply and demand.
Increasing numbers of people want to enjoy the benefits of Berlin’s new economic potency and the leisure activities on offer in the surroundings, and so, over the last ten years, the city has gained around 400,000 inhabitants.
At the same time, the state government has been extremely reluctant to designate new building areas or authorise new building projects.
International Comparisons Illustrate the Harm Done by Rent Control
The economic arguments may seem “cold” and abstract. But valuable insights can be gained from New York, Geneva and Stockholm, where the devastating effects of rent controls have already become apparent.
New York City
In New York State, rent controls were introduced as long ago as 1950 to keep down rentals in the towns. From 1962, New York City was able to determine its own rent control policy. In some boroughs of New York City, rent controls were strictly enforced, which led to rental price levels drifting apart within the city.
New York rent control had three effects that are particularly noteworthy and which were undesirable: firstly, people living in rent-controlled apartments did not want to give them up under any circumstances.
As a result, the supply of rental apartments started drying up. Secondly, rent control caused a dramatic deterioration of the existing building stock. This was because renovating and modernising apartments made no financial sense for investors.
Thirdly, private investors started offering dramatically less stock. The low rental revenues meant that most investment projects were no longer profitable for private investors. As a result of these experiences, New York rent controls were significantly eased in the 1970s.
Instead of capping rentals, only the annual increase in rentals was limited in subsequent years. The restriction continues to apply to about a million New York apartments.
However, in 2019 rent controls were tightened up again. In particular, loopholes that had made it possible to avoid New York rent controls were closed.
In Geneva, rent controls were introduced in 1996 after a referendum. They continue to apply to the present day. The regulation froze rentals on existing agreements and effectively made it impossible to apportion the cost of modernisations. The consequence was that tenants had (and continue to have) no incentive to leave their protected rental relationships.
The lock-in effect has severely restricted supply in Geneva’s rentals market. But even tenants who are benefitting from lower rentals are feeling the negative effects of rent controls: as the costs of renovations cannot be apportioned, landlords have no incentive to invest in their building stock.
As a result, the quality is rapidly deteriorating. In addition, there is almost no private investment in housing construction because investors are concerned that Geneva’s rent control regulations could be extended to new buildings in future.
There is an important lesson in this for Berlin: one of the arguments used to promote rent controls in Berlin is that new housing construction is exempt. In Geneva, the constrained supply is forcing people to move further afield into the surrounding areas, greatly increasing commuter traffic.
Stockholm has had rent control since 1969. The policy specifies that rentals have to be renegotiated annually between representatives of landlords and tenants. It has restricted the city’s housing supply to such an extent that prospective tenants have to wait eleven years on average for an apartment to become available.
Not unexpectedly, this has created a black market: for most apartments, there are illegal sub-letting agreements or illegally negotiated indemnity payments. The OECD gave Sweden’s housing policy bad marks and is urging the country to increase its housing supply by reducing state intervention.
Lessons for Germany
International experiences show the catastrophic effects of rent controls. In all of the towns and countries where such controls were introduced, housing supply dried up while the quality of the housing stock deteriorated massively.
There has been no instance where rent controls have improved the situation. Housing policy that wants to address rising rentals has to focus on supply and demand as the main levers for achieving policy goals.
A 1971 quote by the Swedish economist Assar Lindbeck has recently gained prominence.Regarding the control of rentals by the state, he said: „Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities.“
Perhaps the consequences of rent control are not quite as dramatic as that, but still: rent control has harmed every city where it has been tried.