(Bloomberg Opinion) -- The idea of capping rents for five years in Berlin, the city where they have been going up faster than anywhere else in Germany (except much cheaper Leipzig), has always smacked of Communist price controls. Now the Berlin Senate has published a legislative proposal on how a rent ceiling is supposed to work – a clear indication that the leftist city government has forgotten why East German communism failed. Politicians and regulators elsewhere should study the bill as an example of what monsters such amnesia can beget.
Between 2013 and 2017, Berlin’s population increased by 5.6% while the number of apartments grew by only 2.6%. The population overhang continues to drive rent increases: While last year both the number of city residents and the number of apartments available to them increased by 0.9%, the average rent went up by 5.4%, according to IBB, the city’s development bank. Longtime residents call this “rent madness” and complain they are being pushed out of their neighborhoods by gentrification and greedy landlords. The three parties governing the city-state – the Social Democrats, the far-left Die Linke and the Greens – have decided to regulate the problem out of existence.
It’s not enough for them to set the rent level at the current average, 12.62 euros ($13.90) per square meter per month. The bill sets rent ceilings according to construction year, with the maximum, 9.80 euros, assigned to buildings constructed or fully refurbished between 2003 and 2013 (apartments built since 2014 are exempt from the bill). The 9.80 was the average rent for the newer buildings in the city in 2013. This covers the rent landlords can charge new tenants. Those with existing contracts and paying 30% or more of their income in rent can apply to the borough authorities to have the cap apply to them, too.
For some Berliners, the rule could mean a drastic rent reduction. For example, a single person renting a an apartment of 50 square meters in a 1950s building in Charlottenburg, the part of the city where I live, pays about 750 euros a month in rent; under the proposed rules, if she makes less than 2,500 euros a month net, she’ll get that rent reduced to 304 euros – a life-changing cut. But then, a landlord can also complain if the required rent reduction creates “undue hardship,” leaving it up to the bureaucrats to adjudicate what’s fair in each case.
If the bill becomes law, the borough officials, with the help of IBB, will also determine whether a rent increase is justified after a modernization; they’ll judge whether the improvements are necessary and whether their costs can be reduced.
In other words, for all the housing in Berlin that existed before 2013 – about 1.9 million apartments, or almost 97% of the city’s total number – bureaucrats will gain the authority to lower or increase rents. All apartments, all landlords and all tenants are different, and there’s plenty of room for arbitrariness. Indeed, the legislators are setting an example by picking an arbitrary date to determine the proper rent level: 2013 is a compromise as inexplicable as the previously proposed 2011.
This is all a replay of what was wrong with the Soviet-style command economies that collapsed in the late 1980s and early 1990s. When the state took it upon itself to set prices according to officials’ concept of fairness, the market – which never quite went away under Communist rule – responded by creating powerful incentives for official corruption and illegal mechanisms to deal with artificial shortages. This corrosive combination helped bury the Soviet Union and its satellites: By the time they collapsed, their official economies were mere decaying shells.
The senator responsible for the proposal, Katrin Lompscher from Die Linke, the party descended from East Germany’s ruling political force, was born in 1962, a year after the Berlin Wall went up. She should remember all that.
The intention of the bill is clear: To make the city’s entire stock of pre-2014 housing more or less unavailable to newcomers. With the city determined to keep new contracts at the 2013 price level and threatening landlords with fines of up to 500,000 euros for violations, it should make sense to hold on to current tenants, many of whom will still be paying more than the newly imposed ceiling.
Only post-2014 housing will have rents more or less at the market level, limited only by a 2015 federal rule that links all new contracts and rent hikes to the neighborhood average (though this rule has been dismissed as ineffective, recent research shows that it does work). So that’s where newcomers theoretically will have to try their luck if the new proposal becomes law.
In practice, things will be far more chaotic than that. Landlords, forced to charge low rents, will demand excessive prices for services and any other extras they can think of. The market for illegal sublets, which already exists today, especially within diasporas taking in new immigrants, will become broader. Berliners are accustomed to taking such risks. Though they are threatened with huge fines for not declaring the housing they rent out through Airbnb and similar platforms to the city authorities, only 2,418 permits had been issued to landlords by the city by the end of last year, while between 20,000 and 30,000 dwellings were regularly used as short-term rentals.
But while many landlords will find a way to make money (with the help of city bureaucrats, who will be hugely tempted to help actively or to turn a blind eye), there will be little incentive for any of them – both risk-takers and law-abiding citizens – to invest in maintaining their properties. My family owns the apartment we live in (only 15% of Berlin residents do so), but it’s part of a condominium where some other members rent out their flats. If the rent cap goes into effect, these landlords will no doubt always vote against proposals to raise money for repainting the stairwells or insulating the basement against flooding.
Finally, the Senate proposal is especially egregious given that rents on available apartments in Berlin may have stopped increasing. A recent study by the real estate research firm F+B showed a quarter-on-quarter drop of 1.5% in the three months through June. That reflects slower population growth: In the first half of the year, the city’s population only increased by 6,270 people, about half of last year’s rate. It’s too soon to say this is permanent, but it seems the market is finally working to mitigate the problem, which was never caused by any kind of market failure.
The rental cap must still undergo a public debate, which ends in mid-October, and then the Berlin legislature will argue it out. If it passes, there undoubtedly will be legal challenges even before it would go into effect next year. But even the intention to implement rules like this in 2019 is alarming. Has enough time passed since the Soviet Union’s demise for its mistakes to be repeated?
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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