Berlin’s Rent Control Effort: A One-Year Lookback

3 minute read

Rent control in Germany’s capital is not having the desired impact on the housing market.

Rent control, touted as a strategy to protect residents from rising house prices stemming from demand far surpassing supply, has backfired, according to Bloomberg opinion columnist Andreas Kluth in “Berlin’s Rent Controls Are Proving to Be a Disaster.”

Last year, Berlin implemented a five-year rent control program with a price cap of 9.80 euros per square meter, about $1 per square foot, according to The Washington Post. “Berlin renters would be expected to save $2.75 billion over the five-year period, while landlords would lose the same, according to Berlin’s Urban Development Department,” states The Post.

Apartments built before 2014 had rents frozen at their June 18, 2019 prices, and residents can force owners to lower rents that are defined as “excessive.” The rent freeze covered more than 1.5 million apartments.

However, the efforts have fallen short of the desired outcome, fragmenting the Berlin housing market into two sectors: the larger segment of those built before 2014 and those built after. Although rents have declined in the former, because the measures failed to address the original supply issue, all those still in search of housing drove up the pricing in the latter, with prices rising faster than in the next 13 largest cities in Germany, according to Munich’s Ifo Institute. “Newly built apartments have therefore become even more unaffordable for most people,” writes Kluth.

Further exacerbating the issue is that residents of the newly regulated units are staying put. Writes Kluth, “Unsurprisingly, those tenants fortunate enough to already live in a rent-controlled flat are staying put. And whenever somebody does move out — when moving to another city, for example — the landlord tends to sell the unit rather than re-let it.”

German online real estate platform ImmoScout24 reports a 30 percent decline in new listings for regulated rental apartments between January 2020 to January 2021.

Kluth writes that the resulting market challenges confirm economists’ warnings about the unintended consequences of rent control. Because rent control is not means-tested, the caps only benefit one group of residents, regardless of their incomes: Those already living in regulated apartments. “Simultaneously, they hurt all other groups — especially young people and those coming from other cities — by all but shutting them out of the market,” he writes.

Kluth further addresses another complication in the Berlin market, that of the expectation of Germany’s constitution court to decide on the legality of these rent controls. “If the judges nix the legislation, lots of tenants in the formerly regulated sector could get hit by huge and even retroactive increases in their rents,” he writes.

In October 2019, the Bloomberg Opinion Editorial Board wrote, “Unfortunately, simply capping rents is the worst answer to this problem.… A brute freeze on all rents would destroy any incentive to build new units.” The Editorial Board called for more housing rather than capping rents—constructing new neighborhoods and apartments in unused industrial areas.

The housing shortage is a real problem. Broadcaster Deutsche Welle cites research from the Pestel Institute that there is an apartment shortfall of 670,000 in Germany.

"In addition, landlords are putting back building investment as a result of the rent cap in order to reduce costs due to lost rental income,” says Dr. Thomas Schroeter in a release from ImmoScout24. “In the long run, this will worsen Berlin's housing stock and strain progress in energy sustainability. Berlin therefore urgently needs legal certainty through the soon-to-be-expected decision of the Federal Constitutional Court.” [Editor’s note: Dr. Schroeter’s quote has been translated from German to English].

Michael Miller is the Managing Editor for NAA.