Rent freeze

Soaring rents and political action

While rents in Berlin had been soaring for several years already, in 2020 local politicians in the German capital finally reacted and imposed an unorthodox and rather radical policy: the rent freeze.

This policy dictated upper limits to rent prices for all apartments built before 2014. Depending on quality and location of a flat, the limits were set somewhere between 3.92 and 9.80 euros per square metre and by that clearly fell below the back-then market level. A year after its enactment, the German Constitutional Court revoked the policy on the basis of being declared unconstitutional.

In the 13 months of its existence, however, the rent freeze had significant impacts on the Berlin rental market as well as its surroundings.

A legal disaster but also an economic one

The policy can be classified as a ‘first-generation rent control policy,’ meaning that concrete price ceilings are set by policymakers rather than market mechanisms. Whereas such policies may be beneficial for existing tenants, economic theory does not support such policies and there is consensus among most economists that a fixed ceiling on rents reduces both the quantity and quality of housing available in the market (Arnott 1995).

Indeed, the Berlin rent freeze mechanically reduced newly advertised rents. Yet, several unintended side-effects ultimately led to disastrous consequences meaning even harsher conditions than before for people searching for accommodations to rent.

Higher rents in Berlin’s surroundings

It needs to be noted that the rent freeze was valid only within the administrative boundaries of Berlin yet not in its enclosing federal state Brandenburg although large parts of it still belong to the same metropolitan area.

We document a leakage effect for Berlin’s surroundings: in the neighbouring city Potsdam and further small municipalities asking rents were surging at an accelerated pace upon the enactment of the rent freeze. We could indeed show that asking rents immediately jumped up across Berlin’s administrative border.

But even more important than effects on rent prices are the consequences on the number of units available to rent: We document an increased number of units previously used as rentals being transformed to owner-occupied ones. Further, the number of newly built dwellings was reduced, and, finally, the number of properties advertised for rent dropped.

More difficult housing search for newcomers and young people

Because of this reduced numbers of apartments available to rent, conditions in the rental segment became more challenging for both established households in Berlin wishing to adapt their housing situation due to changing needs but also new would-be renters. The latter includes newcomers and young first-time renters facing a double burden: low (initial) income and reduced availability of suitable housing options. This is quite problematic as people belonging to the age group 18-35 years are the single largest group moving into German cities.

Legal risks for new renters

These effects were paired with insecurity regarding the constitutionally of the policy. This encouraged landlords to add a clause to advertisements stating that renters would have to – should the policy be revoked – pay back the full difference between the regulated rent and the market rent. By that, the legal risk was perfectly transferred to renters putting them into an even weaker position than before.

Overall, this article thus concludes that this ‘policy experiment’ clearly failed and recommends more suitable policy measures instead. These include modern rent control policies that focus on limiting allowed rent increases for existing contracts, wisely designed vacancy taxes, and, most importantly, efforts to extend the overall housing stock.