Berlin’s rent controls prove to be a disaster

If populism on the political right corrupts democracies, populism on the left ruins economies. For the latest evidence take a closer look at the housing market of the German capital, Berlin.
A year ago, a rent cap took effect in the city that was unprecedented in Germany. For all apartments built before 2014, rents were frozen at whatever they were on Jun. 18, 2019. Tenants in those units can also force landlords to lower rents defined as “excessive.”
This reform came courtesy of the city state’s “red-green-red” governing coalition between the three left-leaning blocs in the German political spectrum: the Social Democrats, the Greens and the Left (which descends largely from the communist party of the former East Germany).
That heritage seemed to set the tone of the campaign that preceded the legislation. At times it descended into a competition between the coalition partners about who could play the most demagogic class warrior, rhetorically pitting pitchfork-wielding tenants against let-them-eat-cake landlords. It’s probably no coincidence that there’s even a separate grassroots effort for a ballot initiative to expropriate large property-owning companies.
The underlying problem was real: Rents in Berlin, a place that was once proud of being grungy and affordable, have soared in recent years as demand from new arrivals far outstripped supply.
The right answer to that shortage would be to increase supply — for instance, by cutting red tape in zoning and construction. By contrast, Berlin’s approach falls into the same logical trap as fixing any price. In a food shortage, for example, regulating the price of bread only trades one expression of scarcity (high prices) for another (empty shelves).
Now the empirical data is starting to come in, and four economists at Munich’s Ifo Insitute — Mathias Dolls, Clemens Fuest,
Florian Neumeier and Daniel Stoehlker — have crunched the numbers. What do they say?
Unsurprisingly, the rent controls have split housing in Berlin into two distinct markets: the much larger one, consisting of all apartments built before 2014, which is now regulated; and the smaller unregulated one of relatively new buildings.
Rents in Berlin’s regulated market plummeted in relative terms. But since the excess demand of apartment hunters had to go somewhere, rents in the unregulated market simultaneously started rising faster than in the 13 other cities. Newly built apartments have therefore become even more unaffordable for most people. Price changes in the regulated market dropped relative to those in the 13 other cities. That’s because real estate loses value if
its future cash flows to landlords are capped.

—Bloomberg