Berlin’s rent controls are unconstitutional

As the late Swedish economist Assar Lindbeck memorably put it, “In many cases rent control appears to be the most efficient technique presently known to destroy a city — except for bombing.” And yet that’s never kept economic populists from passing new rent curbs.
One of the most radical such attempts, watched by cities all over the world, was enacted last year in Berlin. Germany’s constitutional court ruled that the law is null and void. In the short term, this will cause even more chaos in the city, forcing many tenants to pay back rents. Worse, the judges’ reasoning won’t put the controversy to rest but stoke it instead, making rent controls an unfortunate hot-button issue in this election year.
Over a year ago, Berlin’s all-left government of the Social Democrats, the Greens and The Left — a party that largely descends from East Germany’s communist regime — passed a batch of rent caps. For all buildings erected before 2014, rents were frozen for five years at what they had been in June 2019. Rents defined as excessive were reduced.
Economists all over the world rolled their eyes. Rent controls, like all price fixing, cannot address the fundamental problem of a mismatch between supply and demand — only more supply can do that. Instead, caps simply create shortages in place of high prices.
The consequences unfolded in Berlin while the law was in place. Only one group benefited from capped or lower rents: existing tenants of old apartments, even the well-heeled ones. Everyone else lost, either paying even higher rents or being locked out of the market altogether.
That’s because tenants of regulated apartments stopped moving out, and the few units that did come on the market were sold in a hurry rather than re-let by their landlords. The overhang in demand — all those frustrated house hunters — converged on the unregulated units, whose rents soared even faster than before. Many found no accommodation
at all.
Meanwhile, several opponents of the legislation were suing in the courts. Some focused on fundamental issues such as the law’s impingement on property rights. But the case before the constitutional court in Karlsruhe — brought by politicians from the center-right Christian Democrats of Chancellor Angela Merkel and the pro-business Free Democrats — pursued a different logic.
What it argued and what the judges confirmed was that in Germany’s federal system the 16 states, including Berlin, have no business legislating matters that are already covered by federal law. And there’s already a lot of national housing regulation, albeit less ambitious than Berlin’s attempt. Because the city-state’s law conflicted with federal statutes, it therefore never took effect.
This verdict will satisfy few people and enrage many. Many tenants now have to pay arrears for which they didn’t save. This could become social dynamite. Moreover, the rent controls’ creeping long-term distortions of the market won’t now become visible, allowing the radical left to perpetuate the urban myth that they would have saved Berlin’s struggling tenants, if only conservative adversaries and judges hadn’t interfered. Already, politicians of the three left parties have concluded that the answer to the court verdict is to go ahead with the same draconian rent controls at the national level. They will make this one of their rallying cries leading up to the election of Sepember 26, alongside calls for new wealth taxes — also ruled unconstitutional in Germany in the 1990s.
The hard liners of the three left parties will wage a campaign
that’s economically illiterate and populist.

—Bloomberg