(Bloomberg Opinion) -- The leftist coalition running Berlin’s city government has agreed on the final version of a five-year rent freeze, and it will likely become the German capital’s law on Tuesday. While the resulting legislation is less onerous than previous proposals, it will still distort the market, benefiting existing tenants at the expense of newcomers, shrinking the supply of apartments for rent and making landlords less likely to maintain properties in good condition.
The city government is run by three parties — the Social Democrats, the far-left Die Linke and the Greens. All three have been sympathetic to complaints from the city’s renters — who occupy about 82% of all apartments — about what’s come to be known as “rent madness.” Rents in the capital have been going up by an average of 2.8% a year since 2000.
The original rent-freeze plan was developed by the city official responsible for housing, Katrin Lompscher of Die Linke. It would have imposed a five-year freeze on rents for all but newer housing, at the arbitrarily chosen cutoff of 2013, and allowed city officials to redraw existing contracts based on the financial circumstances of the landlords and tenants. The plan was a throwback to the Communist command economy familiar to the residents of the city’s eastern part. East Berliners keep voting for Die Linke, descended from East Germany’s ruling party, so that’s apparently not a problem.
The Social Democrats, however, are the leading party in the governing coalition, and they’ve been skeptical of the freeze — although not because developers have been raising hell and the right-wing opposition has, predictably, taken their side. Rather, it’s because the proposal — especially the part about lowering existing rents -- was legally shaky. So the compromise version is somewhat more sober than Lompscher’s original.
The freeze kicks in at the beginning of next year. After that, the maximum rent that can be charged on new leases can't be higher than that in the last lease, and in most cases it must be lower because the ceiling is still linked to the 2013 level with 13.4% added to account for rising incomes. Starting in 2022 and until the freeze runs out at the end of 2024, landlords can increase rents by no more than 1.3% a year. Existing rents can only be lowered in rare cases -- if they exceed the newly established ceiling by more than 20%, which is considered gouging. But to handle applications from tenants who want a reduction, and to enforce the rules on rent-increasing renovations (these will be strictly regulated), the city will need to hire up to 250 extra bureaucrats.
Only housing built since 2014 and some social housing will be exempt from the freeze.
In Germany, the Berlin freeze breaks new ground: Nothing quite like this has been done before. Big landlords intend to try to overturn it in the courts as an unconstitutional attack on property rights, and it's difficult to predict how judges will handle the conflict between Berlin’s rights as a state and the damage to apartment owners. But the effects of what the city is about to do are already well-studied.
In 2017, Rebecca Diamond, Tim McQuade and Franklin Qian from Stanford University published a paper on the effects of rent control expansion in San Francisco. There, they wrote, rent controls have had the unintended effect of aiding gentrification, as landlords took rental apartments off the market and sold them instead. In a 2018 paper, Andreas Mense from the University of Erlangen-Nuremberg and Claus Michelsen and Konstantin Kholodilin of the German Institute of Economic Research in Berlin documented a similar effect of rent controls in Germany, even though it’s generally harder to terminate a lease here than in the U.S.
Buyer demand will be there for apartments taken off the rental market. Home ownership in Berlin has been rising in recent years as a response to fast-growing rents; the demand will be further fueled by the new legislation since rents for new housing, exempt from the freeze, will go up even faster and newcomers to the city will increasingly look for apartments to buy rather than rent.
The Stanford study found that existing tenants benefiting from rent controls tend to move less often. But rents still rise citywide, mostly because landlords reduce supply. “On net, incumbent San Francisco residents appear to come out ahead, but this is at the great expense of welfare losses from future inhabitants,” the Stanford economists wrote.
But then, it’s logical that Berlin politicians aren’t worried about future residents or about rising ownership rates at the expense of the rental market. That market probably will shrink slowly because of the difficulty of kicking out tenants, and the politicians are there to protect their current voters. Berlin has the fourth highest poverty level among German states, and there’s evidence that rent controls do protect the poorest and most vulnerable social groups.
For the existing tenants, though, the new legislation will likely mean a decline in the quality of housing stock. The Mense paper shows that in German markets where rents are regulated, landlords’ investment in maintenance drops considerably — and that goes even for the types of housing exempt from the regulation: Landlords fear that controls may be imposed on them, too.
Again, that’s not really a problem for the leftist city government. Berlin won’t fall apart in five years because of less maintenance investment. Besides, benefits to poorer tenants who will avoid being displaced thanks to the rent freeze outweigh the inevitable deterioration on the political scale.
Berlin’s political reality is that there aren’t enough homeowners to stave off harsh rent controls. Only the landlords’ legal efforts could thwart the leftist majority’s regulatory ambitions. But since the compromise version of the bill is designed to ward off the most obvious challenges, there's a strong likelihood that the rent freeze will stand — and tempt other leftist state governments to follow Berlin's example.
To contact the editor responsible for this story: Tobin Harshaw at tharshaw@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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