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This EuroNews article tells us about the Berlin freezing of rent prices:

Berlin is freezing the rents of 1.5 million apartments for the next five years starting this Sunday in a controversial move to control the exploding costs that have forced many to move outside Germany's capital city.

This seems to be a rather strange decision in a free market. While the article does not specify the underlying cause of the rising prices, I expect to be related to:

  • more and more high-income people come to work in Berlin
  • new residential building are too few compared to the number of persons who want to live in Berlin

Clearly capping the rent prices does not seem to tackle the causes above and I am wondering what the authorities hope to achieve with this.

Question: Why did Berlin freeze the rent prices as opposed to letting the market set the price?

Martin Schröder
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Alexei
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    The article you cite clearly states 'freezing the rents .. to control the exploding costs' so the reason is very clearly stated. Of course you can question whether this is a good way to do this but the question 'why did they do it?' is very obviously answered in the sentence you quoted. If that is not what you meant than please clarify your question. – quarague Feb 26 '20 at 10:35
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    Lots of comments deleted. Please remember that the goal of comments should be to improve the question, not to discuss its subject matter. Please read the help article about the commenting privilege before you engage in comment debates. – Philipp Feb 27 '20 at 09:26
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    For comparison to another region undergoing a similar episode see the San Francisco Bay Area, in particular San Jose. As of my google search just now, they do not seem to have implemented full rent freezes, but the state government has implemented some rent controls – Izzy Feb 27 '20 at 14:24
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    Related: https://economics.stackexchange.com/questions/34214/what-is-the-likely-result-of-rent-control-in-berlin – the gods from engineering Feb 28 '20 at 11:59
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    Related: https://economics.stackexchange.com/q/34249/332 – gerrit Mar 02 '20 at 18:21

10 Answers10

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The market was somewhat more free before the rent freeze (it was not completely free, see antipattern's excellent answer), and this had effects that some Berliners considered undesirable. The article describes what some of those effects were:

...in recent years, rents have skyrocketed...pushing middle-class families from Berlin's central residential neighbourhoods like Mitte or Prenzlauer Berg to the outskirts. Even traditionally working-class and immigrant neighbourhoods like Neukoelln or Kreuzberg have become so gentrified that long-time tenants can no longer afford the rising rents.

In addition there is an overall housing shortage in Berlin, which makes it even more difficult for newcomers or those who get pushed out of their homes due to the rent spike to find new, affordable living accommodations.

In short, people who have lived in Berlin for a long time, and who are not rich, are losing their homes to people who can afford to pay more. Or maybe they can barely afford to stay in place, but have no money left for anything else. Either way, they're not happy about it. There were substantial protests last year.

The next question is, why has the Berlin government chosen to listen to these unhappy people?

  • Partly it is because these people are voters, and elected officials want to keep their jobs.
  • Partly, in the left-wing parties, there is a philosophical belief that the desires of renters (to keep a roof over their heads, to remain in a strong and familiar community) are more important than the desires of landlords (to make a profit).
  • I have also heard a "practical" argument: if only rich people can afford to live in the city, who will fill the lower-paid jobs? (I'm not sure if that specific argument has been used in Berlin, but it has been used in other cities. Also, I am not commenting on whether or not that argument is correct/plausible.)
Community
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MJ713
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    Lots of comments deleted. Please remember that the goal of comments should be to improve the answer, not to discuss its subject matter. Please read the help article about the commenting privilege before you engage in comment debates. – Philipp Feb 27 '20 at 09:27
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    In France, rent have been frozen after WWII and for decades. One of the consequences was landlord forced to sell. For some left wing economists, that can be considered as an indirect redistribution of wealth. – Ernest Jones Feb 28 '20 at 09:16
  • listening to the people is ok, and the OP does not dispute this, but simply asks the question of whether this actually solves anything, because it doesn't seem so based on the arguments mentioned in the question. This answer does not address the main point of the question. – Andrei Feb 28 '20 at 14:19
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    @Andrei The question asks why they restricted rents. The reason they restricted rents is because rents were too high when they didn't. Someone else has asked a question on economics.se about the results. – Reasonably Against Genocide Feb 28 '20 at 15:33
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    I feel this answer overlooks the kind of thinking involved in design of good, working systems. If you create a system with certain constraints, such as 'limit property construction and confine property to within X km of Berlin' and set certain rules like 'let the richest buy property and charge rent at will', you a) have no free market but a constrained one and b) your system will result in the richest few owning everything. That some people argue that this is also right and just is incidental – Frank Feb 29 '20 at 21:56
  • @Frank Right. A true free market would also allow people to construct little sheds on sidewalks and parks to sleep in. If they're constrained from doing that, the market is not free. – Reasonably Against Genocide Jul 03 '20 at 10:47
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Rent for new buildings isn't capped (at least not by this new law), so the cap shouldn't interfere with new buildings. Rent may also be increased up to a point when a building is modernized.

The cap was implemented because the market didn't work for a lot of people who needed to spend more and more of their income on rent or be driven out of Berlin. The market also failed to build an adequate amount of new housing before the cap (fewer housing than needed for new residents were build, and the city actually build 25% of new housing itself). Experience has also shown that the market reacts to new buildings not with lower, but with increased rent. And despite the high need for affordable apartments, there was a high amount of vacancy. Because of this, the cap was very popular among voters (over 70% approval).

tim
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  • What is your source on rent increasing when new housing is built? Supply and demand would suggest the opposite so I am curious if there is evidence that suggests the contrary. – Magnus Jørgensen Feb 26 '20 at 08:44
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    @MagnusJørgensen the linked wikipedia article ("Im Gegenteil sei für 80 deutsche Städte belegt, dass „mit steigenden Neubauaktivitäten die Durchschnittsmieten eher steigen“"), which gives as source a letter (see chapter 4) from urban development scientists. – tim Feb 26 '20 at 09:07
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    Related: Has an increase in housing supply in popular cities including Amsterdam led to an increase in house prices? – gerrit Feb 27 '20 at 08:41
  • Lots of comments deleted. Please remember that the goal of comments should be to improve the answer, not to discuss its subject matter. Please read the help article about the commenting privilege before you engage in comment debates. – Philipp Feb 27 '20 at 09:55
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    @tim I don't think it's entirely unreasonable on an English site to expect cites to be in English. – Acccumulation Feb 28 '20 at 03:59
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    @Acccumulation And I normally don't use German cites, but as this is a question about Germany, I feel that it is to be expected that most cites on the issue will be in German. – tim Feb 28 '20 at 08:09
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    Interesting aspect that prices are rising and so does occupancy. Wouldn't then some tax on non-occupancy have solved this issue better than price-capping. Price-capping might be a good measure to buy time, but it can't solve the issue on itself, so parallel solutions are needed. A time will come when the capping will be removed and it's not gonna be pretty. – Andrei Feb 28 '20 at 14:23
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    @Andrei The cap will be removed in 5 years, but then there are still previously existing softer caps in place (rents can only be increased to a certain amount above the average of the area and only a certain percentage a year). Berlin released a new plan to increase housing last year, which hopefully will resolve some of the problems before the end of the cap. – tim Feb 28 '20 at 14:35
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    @tim The claim "Experience has also shown that the market reacts to new buildings not with lower, but with increased rent." isn't phrased as being Germnay-specific. It's also not phrased as "sometimes", but "always", or at least "usually". If it were really the case that increased supply always, are at least usually, causes increased rent, then there should be plenty of evidence in English of such a phenomenon. – Acccumulation Feb 28 '20 at 21:15
  • @Acccumulation A more helpful approach would be for you to actually find and deliver this evidence in English. If the evidence is available in German only then automatically any English language counterexamples are invalidated by the uniqueness of the German situation – Frank Mar 01 '20 at 23:04
  • @Acccumulation well, the highest rents are always where the most people are! – Reasonably Against Genocide Jul 03 '20 at 10:49
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The unopportunistic and unattractive truth (I'm not afraid of saying it) is that Berlin is a red-red-green governed city and rents are one of their most important lighthouse projects. Also, the market does not, and cannot work because the market is actively prevented from working.

The market is driven by offer and demand. Demand has been going up, so consequently, either prices go up, or offer has to go up in sync with demand.
Offer, however, depends on availability, and availability is being actively sabotaged, both directly and indirectly (by the state government as well as the same city senate that complains about too few apartments being available, and too expensive).

Like in every good lie, there is a small grain of truth in here. Rents in Berlin did explode. However, they exploded from virtually nothing to well below average, which is about half of what you pay in some other places.

You get a smallish apartment for around 10€ per square meter in Berlin, and it's around 11-12€ for a mid-sized or larger one (feel free to consult e.g. immowelt which has detailled comparison charts for virtually every city).

For the smallish kind of apartment, you'd pay 12€ in Cologne and 20€ in Munich, for the mid-sized (and larger) it would be around 11€ and 18€, respectively. For Frankfurt, figures are around 14-15€, for Stuttgart around 13€.

Sure enough... you can get an apartment in a mid-sized non-spectacular city (say, Kassel, no offense intended) for 1-2€ cheaper than in Berlin, but you can hardly compare some moderately unimportant city in the middle of nowhere with living "Downtown Capital City, the most exquisit place to be". Which, as it happens, is a city roughly 12 times as large, too. I mean, seriously. These are just not the same things, you cannot compare them.

Thus, from a purely objective and non-ideologic point of view, there is actually nothing to complain about. Living in Berlin costs half as much as living in Munich. Whining about a non-issue, and being served by red-red-green in a no-effect, but very visible manner.

For red-red-green, it is political gold to prevent the evil class fiend from stealing from the poor, and capping rents is much easier to do than to actually do something about the general problem of housing being behind demand. It doesn't even matter that it makes the situation worse instead of better as there is no big incentive for house owners to invest in modernization, or for ground owners to build (if they get a permission at all!). It simply isn't worth it.
Of course the city could build affordable housing, but oh my, that would be a lot of work, and it's not nearly as effective politically than to point a finger at the class fiend.

This is not limited to Berlin, but Berlin in particular has been giving out significantly fewer permissions to build than to cover the need during the last years (with fewer every year). Which they do away with pointing at overhang and the fact that the rent cap wouldn't apply to the new apartments.

The regulations for building new houses get crazier and crazier (which means more cost-intensive) so with the rent cap in place it is almost no longer profitable to build at all -- if you get a building permit at all. The best thing that a ground owner can presently do is... do nothing. Just wait and see how prices go up.

Given the situation that is explicitly created by the government on every level (ECB negative interest, Bund, Länder, Städte, alike) it will be "fun" to see what becomes of it. Surely, the situation will not improve any time soon.

The subvention of compensation for PV is going to be cancelled this year unless Altmaier gets his stuff together before the 52GW ceiling is hit (unlikely...), which is a truly smart thing to do when you are actually shouting "Energiewende" all over, and the planned EnEV2021 which is yet crazier than the present one will make building affordable apartments for rent even less attractive than it is already. So if you will be looking for an apartment in 2022-2025, good luck.

Be that as it may, in Berlin, people currently don't have much to complain about compared to other places.

Damon
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    This problem is not unique to Berlin - every Western city keeps complaining about unaffordable rents while failing to abolish restrictions on new construction that would've actually solved the problem once and for all – JonathanReez Feb 26 '20 at 19:47
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    There are a very few cities that do a better job. You can tell which they are by looking at real estate prices over the 2007/2008 upheaval. Cities that leave the market alone saw in the range of a 1% variation over this period. – puppetsock Feb 26 '20 at 20:07
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    @JohathanReez: That's right, I said the problem is not limited to Berlin. Not long ago, maybe 3 months or so, it was published that our Landesregierung is aware that three times as many newly-built apartments are needed than they will allow (funny how it's possible to do that!). But Berlin is unique insofar as they're whining and introducing a negatively affecting market regulation (which is a strictly speaking a violation of the Recht auf Selbstbestimmung) when the situation is actually quite good compared to other cities. – Damon Feb 26 '20 at 20:35
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    @Damon You should post a link to that. Even if it's in German - translators exist. – Reasonably Against Genocide Feb 26 '20 at 21:44
  • By "ground owner", you mean "land owner"? – Zeus Feb 27 '20 at 01:13
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    I'm not sure this clearly addresses the question as asked. This is less an answer to "Why did Berlin do this?", and more an answer to "Was it a good idea for Berlin to do this?" And on a side note, any Americans reading this will have no idea what "red-red-green" means. – MJ713 Feb 27 '20 at 02:59
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    When you say "offer", do you mean "supply"? – Acccumulation Feb 27 '20 at 05:33
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    Seriously, what's red-red-green? – zibadawa timmy Feb 27 '20 at 06:21
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    @zibadawatimmy red-red-green is referring to the current majority coalition of the Left party (a successor to the GDR's communists) the Socialist party and the environmentalist Green party in Berlin's senate (a state parliament) with red, red and green as the respective parties' chosen colors – the-wabbit Feb 27 '20 at 07:41
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    In English we typically speak of "supply and demand," not "offer and demand," which sounds like a dysfunctional contract negotiation, not a principle governing economic markets. – phoog Feb 27 '20 at 08:07
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    It’s worth pointing out that wages in Munich are higher to match the higher cost of living. – Jan Feb 27 '20 at 10:37
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    Rents may be lower than in other major cities but was the rise in-line with a rise in minimum wage? Or state pension? Because if not, it is the loss of affordability of rents for those who previously could afford them that is important to residents. If you go from spending a third of your earnings on rent to two thirds within a few years you aren't going to care that it's still cheaper than living in Munich – Lord Jebus VII Feb 27 '20 at 10:38
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    @LordJebusVII It's worth noting that Berlin is (on average) poorer than the rest of Germany. Typically, you expect higher rents and higher wages in capital cities. Berlin doesn't have higher wages, apparently. – Reasonably Against Genocide Feb 27 '20 at 10:47
  • @Damon You should really post a link to that, because I wonder what the reasons are for not allowing them. They probably have valid-seeming reasons. – Reasonably Against Genocide Feb 27 '20 at 10:47
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    @user253751, "higher rents and wages in capital cities" is usually a symptom of not investing in the periphery, which would be bad. You can often find medium-size businesses with hundreds of employees in small towns in the middle of nowhere in Germany, but you wouldn't find that in Spain because their entire economy is concentrated in a few cities. – Simon Richter Feb 27 '20 at 11:05
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    "from a purely objective and non-ideologic point of view" [citation needed] – Simon Richter Feb 27 '20 at 11:06
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    @SimonRichter I'm trying to justify why it's a problem that Berlin rents are the same as rents in other German cities: because peoples' average income is lower. To figure out whether rent is too high, you have to compare it to local incomes, so you can't compare the absolute value between different cities. – Reasonably Against Genocide Feb 27 '20 at 12:28
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    @SimonRichter The thing this clause forgets is that "people should not be regulated and the market is always right" is itself an ideology. – Reasonably Against Genocide Feb 27 '20 at 12:43
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    @LordJebusVII Why should it? There's a reason why pensions and minimum wages aren't regional. What do you think happens when you match government handouts to the prices of where you live? These are things that have been figured out in the 18th and 19th century - having a safety net can be beneficial, but encouraging people to do exactly the thing that leads to highest possible waste? Driving prices even higher for everyone? Why should the tax payers pay for your unwillingness to move to some place cheaper? – Luaan Feb 27 '20 at 13:22
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    @Luaan Not sure I get your point, the question asks why Berlin freezes rent, the top answer correctly addresses this: it's what the voters in Berlin want. This answer suggests that they shouldn't want to keep rent down because it is cheaper than in other cities. The voters in Berlin don't care if the policy makes rent elsewhere more expensive. Why would they vote against it if it meant losing their home even if it is in the best interest of the market? – Lord Jebus VII Feb 27 '20 at 14:08
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    @LordJebusVII Ah, you're assuming the residents decide. In that case, you would be mostly right (in the short term), yes - in general, land owners want to keep as tight control over other potential land owners as possible. If I can convince the city council to make it impossible for anyone to build more houses, I don't have to deal with competition from newcomers. It only becomes obvious why it's a bad idea ten or twenty years later, as the buildings slowly fall apart due to lack of maintenance. Even better if I can buy the (now cheap) houses and convince the council to raise rents again :P – Luaan Feb 27 '20 at 14:23
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    Part of the problem in Berlin is that existing landlords are opposed to new buildings, because that would reduce the pressure on the rental market. By specifically excluding new buildings, the idea is to create an incentive to build. Previous measures allowed exceptions for "substantial improvements", which caused a lot of elevators to be added on the backside of existing buildings (where they are close to useless, as you still have to walk the stairs to reach it) in order to justify rent increases. – Simon Richter Feb 27 '20 at 18:54
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    It also doesn't help that the largest landlords are investment companies that have promised their investors 20%+ interest and have not built a single house in the last ten years -- there is simply no trust in the market regulating things, as it has already failed to do so. – Simon Richter Feb 27 '20 at 18:56
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    @SimonRichter Sources for your claims would make the bones of a useful answer to this question. – Ian Kemp Feb 28 '20 at 10:22
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    The government is scapegoating the free market for the consequences of its anti-free-market policies? Surely you jest! – EvilSnack Feb 28 '20 at 12:32
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    @EvilSnack Is the government scapegoating the free market or is the free market scapegoating the government? We will never know. Are there any popular cities (with rising incomes and an influx of new people, etc) that don't have a rent problem, regardless of rent control? – Reasonably Against Genocide Feb 28 '20 at 15:35
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    "10€ per square meter in Berlin" where exactly? – njzk2 Feb 28 '20 at 21:57
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    I'll point you to Vancouver, where downtown is now covering every available square foot with a new 40+ floors condo building, without any positive effect on affordability – njzk2 Feb 28 '20 at 22:01
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    Since the free market does not actually exist, it must be the former. – EvilSnack Feb 29 '20 at 12:41
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    the city could build affordable housing, but would that even work to reduce prices? – gerrit Mar 01 '20 at 00:06
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    "from a purely objective and non-ideologic point of view", that's rich coming from obvious libertarian. This answer is dripping ideology of market worship and total subjectiveness of austrian "school" of "economy". – M i ech Mar 01 '20 at 02:01
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    It is incorrect today to say that market price is driven by supply and demand. Demand is driven by mortgage/credit availability, and supply is driven by equity terms offered by coinvestors in development projects (aka credit availability too) . A large percentage of the population are directly or indirectly involved in both sides of the equation deriving their income from this. What you have is more a dynamic feedback system where both sellers and buyers simultaneously regulate and drive credit creation. The credit created also represents >90% total money supply. So, no. Answer makes no sense – Frank Mar 01 '20 at 23:14
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    @Miech: It is hardly "obvious libertarian" if you care to actually look at the facts. Regulations have gone from ~5,000 to ~20,000 during the last decade (source: Deutscher Städte- und Gemeindebund) and construction prices accordingly. Also, the BER Mietdeckel will start at 3,92 and end at 9,80€, which is ridiculously low compared to everywhere else and compared to the cost to buy the respeactive apartment to let. Though I'm grateful you only called me a Libertarian, because usually when you say something against ultra-left ideology, you're being called a Nazi, guess I've been lucky. – Damon Mar 02 '20 at 15:34
  • @Frank If you fold all of that into either "supply" or "demand", then technically it's still driven by supply and demand. – Reasonably Against Genocide Jul 03 '20 at 10:45
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    @Damon literally nobody has been called a Nazi as a result of supporting the free market, except perhaps as hyperbole. When people are called Nazis seriously, it's because of their other opinions, which happen to have some correlation with free market politics. – Reasonably Against Genocide Jul 03 '20 at 10:46
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    @user253751: Not so, unluckily. The farther left you are, the more it's allowable to say (e.g. "murder the richest 1%") everything and anything, and it is also allowable to actually do everything and anything. Steal? Break and enter? Throw incendary stuff at police? Not only perfectly allowable, it is even called "tradition" if you do it on 1st of May. Bomb attacks? Perfectly fine. Don't agree with that? Nazi. Don't agree with importing armed criminals (emphasis on criminals, not talking about actual victims) from Africa? Nazi. Gets worse on an European level. Don't want common debt? Nazi. – Damon Jul 03 '20 at 17:16
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    @Damon you are ideologically possessed. – Reasonably Against Genocide Jul 03 '20 at 17:19
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    It's the universal "Yeah I'm short on arguments, so I'll throw this at you" term. And yes, it is used regularly against people who are not Nazis at all. Very frequently and commonly. As for ideologically possessed: No, on the contrary. I'm just fed up with ideologically possessed people and the nagging, insults, and damages that I've been getting from them during all my life. This includes the unfounded Green craze and the Vegan craze (which incidentially often goes with ultra-left ideology, too), as well as these constant "redistribution" ideas. What about working? – Damon Jul 03 '20 at 17:20
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Because the Berlin government fails to understand (or at least publicly acknowledge) that price freezes don't work. This has been proven time and time again, but it is easy for politicians to ignore the physical reality of how the world operates, as long as it brings them more votes during the next election. Case in point:

  1. No, rent control does not work — it actually benefits the rich and hurts the poor
  2. Why Rent Control Doesn’t Work
  3. What does economic evidence tell us about the effects of rent control?
  4. The Evidence Against Rent Control
  5. The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco
  6. See a related discussion on Economics.SE

Nothing good would be achieved by this policy, so it would most likely be shut down after a few years - just like it was shut down in every other city that experimented with the idea.

JonathanReez
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    Source 1 makes a point (that people don't move out) which I don't actually understand how it's bad. The point is so people don't have to move out. It uses an example of someone renting a 6-room apartment he doesn't use, but he could strike a deal with his landlord to swap it for a smaller one with even less rent, and the landlord would benefit. Source 2 kinda has a point, but it'll still even out over the long run. Source 3 actually says that it's good (makes it easier to owner-occupy). Source 4 is blocked in Europe. Source 5 only complains about the law having loopholes. – Reasonably Against Genocide Feb 26 '20 at 19:27
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    Source 2 also jumps straight from concrete effects ("more owner-occupiers") to abstract concepts ("less supply of housing") without explaining the link. Owner-occupiers are consuming housing, are they not? – Reasonably Against Genocide Feb 26 '20 at 19:31
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    I gave you thumbs up. You could improve your answer by bringing some of the discussion in your citations onto the page here. For example, the motivation of owners to keep property values high includes voting for city laws that tend to reduce housing supply. Berlin is not the most egregious example of this, but it is clearly there. – puppetsock Feb 26 '20 at 20:10
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    Look up the rent control system in Sweden, especially Stockholm. – d-b Feb 26 '20 at 21:31
  • Lots of comments deleted. Please remember that the goal of comments should be to improve the answer, not to discuss its subject matter. Please read the help article about the commenting privilege before you engage in comment debates. – Philipp Feb 27 '20 at 09:36
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    @Philipp Does this really answer the question? It insults Berlin government and Berlin voters by saying 'they're just stupid'. And why because in opinion of poster 'it doesn't work' (as intended)? Proof is then opinion in pundit papers from elsewhere about elsewhere, not Berlin. So now that we know you oppose the Berlin decision on ideological grounds, can you add some background about Berlin? 'What did they argue in favour for it' seems to be the question. – LаngLаngС Feb 27 '20 at 10:23
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    @LangLangC we've got hundreds of posts on Politics.SE which question the intelligence of various governments and voter groups. If you open a question on Meta.SE, I'll list plenty of them. As for Berlin's arguments - I fail to find anything unique in their reasoning, at least not in English language media. Their arguments are the same as in every other city that played with the idea. – JonathanReez Feb 27 '20 at 17:06
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    I only read the first and last citation, they both study otherforms of rent conntrol like social housing and....black hispanic, non white white asian heterogeneity being misallocated to heterogenous housing... i thought what thefck at least make sense in the english text via rhetoric and clarity... the last study had a pathetic race maths analysis without any substance-ial theory.maths no theory?... no idea how they misallocate mixed race tenants to mixed race housing... no logic at all in last study of localized heterogenous rent control. – bandybabboon Feb 27 '20 at 23:30
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    Can you propose an alternative that works? – gerrit Mar 01 '20 at 00:04
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    @user253751 That's false. Source 3 doesn't say "it's good". It says: "While rent control appears to help current tenants in the short run, in the long run it decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood." – user76284 Mar 06 '20 at 00:34
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    @user253751 That's not true. Source 5 says: "Rent control’s combined effects of increased gentrification and limiting displacement of minority tenants have arguably led to a higher level of income inequality in the city overall... society desires to provide social insurance against rent increases, it may be less distortionary to offer this subsidy in the form of a government subsidy or tax credit." – user76284 Mar 06 '20 at 00:35
  • @user76284 I must've missed that part. Basically "It creates inequality by not forcing poorer people to move out"? I don't see why anyone would complain about that. – Reasonably Against Genocide Mar 06 '20 at 14:50
  • @user76284 You don't get to kick the poorest people out and then say you solved income inequality because there aren't any more poor people. That's not how that works. That doesn't solve income inequality, it makes it worse and hides it from the statistic you're measuring. – Reasonably Against Genocide Jul 03 '20 at 10:49
  • @user253751 Source 2 doesn't say "it'll still even out over the long run". In fact, it explicitly says "Rent regulations, meanwhile, appeal to the public and politicians, but they also create perverse incentives that in the long run work against affordable housing." – user76284 Jul 03 '20 at 11:02
  • @user253751 Source 5 doesn't "only complain about the law having loopholes". Its conclusion says: "Rent control appears to have increased income inequality in the city by simultaneously limiting displacement of minorities and attracting higher income residents. These results highlight that forcing landlords to provided insurance against rent increases can ultimately be counterproductive. If society desires to provide social insurance against rent increases, it may be less distortionary to offer this subsidy in the form of a government subsidy or tax credit." – user76284 Jul 03 '20 at 11:05
  • @user76284 I think you wrote those comments already – Reasonably Against Genocide Jul 03 '20 at 11:06
  • @user253751 Source 2 does not "jump from concrete effects to abstract concepts". It says landlords who are susceptible to rent control reduce rental housing supplies by 15 percent either by converting to condos, selling to owner-occupants, or redeveloping buildings. Why? Because renting out their apartments is now less profitable than selling to owner-occupants. This is a straightforward example of substitution on the supply side, and it's the same effect documented by Source 5 ("substituting to other types of real estate"). What exactly isn't clear? – user76284 Jul 03 '20 at 11:17
  • @user253751 "You don't get to kick the poorest people out and then say you solved income inequality because there aren't any more poor people." No, the problem is that you deprived more people from having housing in the first place. Rent control inhibits construction of new housing. It reduces the overall supply of housing. – user76284 Jul 03 '20 at 11:24
  • @user76284 the comment I replied to was about income inequality. You can't solve income inequality by forcing poor people to move somewhere else. – Reasonably Against Genocide Jul 03 '20 at 11:29
  • @user253751 Reducing the supply of housing through bad policies sure as hell doesn't help. We must remember the most important lesson of economics: Economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups. – user76284 Jul 03 '20 at 11:36
  • @user253751 The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups. – user76284 Jul 03 '20 at 11:36
  • @com.prehensible Your comment is incomprehensible. – user76284 Jul 03 '20 at 11:40
  • @user76284 the comment I replied to was about income inequality. You can't solve income inequality by forcing poor people to move somewhere else. Everything you have said in reply to this comment was irrelevant to the comment. – Reasonably Against Genocide Jul 03 '20 at 11:40
  • @user253751 "also nobody in this comment section is called com.prehensible" Please at least make an effort to look first. https://politics.stackexchange.com/questions/50465/why-did-berlin-freeze-the-rent-prices-as-opposed-to-letting-the-market-set-the-p/50488?noredirect=1#comment202035_50488 – user76284 Jul 03 '20 at 11:41
  • @user253751 The point is that reducing the supply of housing exacerbates income inequality, and in a definitively bad way: by making the poor as a whole worse off. – user76284 Jul 03 '20 at 11:43
  • @user76284 doesn't it also make the rich worse off? – Reasonably Against Genocide Jul 03 '20 at 11:47
  • @user253751 I think that would be a good question for Economics.SE (what are the magnitudes of the second- and higher-order effects of such a policy). – user76284 Jul 03 '20 at 11:50
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I'm surprised to note that no one has mention services like AirBnB. I do not know if this is the case for Berlin, but other cities with a significant tourist sector, like Reykjavik for instance, has had the problem of people buying apartments and then renting them out within services like the aforementioned.

This causes a situation were residents are pushed away in favour for short term "residents" in the form of tourists searching a place to stay at. Freezing the rents might be an attempt of preventing a city becoming void of permanent residents.

Björn Larsson
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    Queenstown, NZ is a town in which this happened, where it has not been constrained. The linked paper's abstract says there are 200 AirBNBs for every 1000 residents. Even ignoring whatever other side-effects such a number of tourists has, that means the available housing for permanent residents is decreased by 20-50%. – Reasonably Against Genocide Feb 27 '20 at 12:31
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    This problem certainly exists in Berlin, and is supposed to be addressed by legislation, but I don't see how a rent freeze is intended against AirBnB-ification. The rental cap does not apply to renting out for 3 days on AirBnB, so if any case this would make AirBnB-ification worse. Have any proponents citing the AirBnB problem arguing in favour of the rental cap? – gerrit Feb 27 '20 at 13:09
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    Maybe. Why is that a bad thing, though? Will freezing rent prices help with this problem? How, if it simply means that AirBnB becomes even more profitable for the people renting their flats out? – Luaan Feb 27 '20 at 13:25
  • @gerrit, I'm just giving a possible reason why the Berlin government implemented a rent limitation. Your comment is asking if a rent limitations is effective against AirBnB, and that is a completely different question which I will not adress. – Björn Larsson Feb 27 '20 at 15:08
  • @Luaan, I have no idea whether Berlin considers AirBnB a good thing or not. I'm just saying rent limitations might be a city government's attempt to limit it. If it is a good thing to do, or if it's effective is another question. :-) – Björn Larsson Feb 27 '20 at 15:18
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    @BjörnLarsson My point is not so much that rent control is ineffective at combating AirBnB, my point is that I don't believe it is at all given as the reason by anyone, which is why I would invite you to add some sources/citations to proof me wrong. – gerrit Feb 27 '20 at 15:18
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    It's certainly the case in most other cities, that AirBnB pays better than normal rent, and it pushes up rental prices. That would definitely raise traffic issues if there are some, because the tourists displace the local workers further away. The worst traffic is Cannes, and Nice, France. The waiters and workers who pander to the elite queue for 1 hour in their cars to get to work in the high-season, to serve the tourists, and many of them can't even afford AC in their cars, their car goes to 35 degrees in the morning sun at 9' Oclock! it's fairly insane. every day all summer! for a pittence – bandybabboon Feb 28 '20 at 00:48
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    I don't think AirBnB is much of a factor here, as Berlin has already a ban "Ferienwohnungen" as they call it. – antipattern Feb 28 '20 at 08:48
  • (Fereinwohnungen = "vacation dwellings") – Reasonably Against Genocide Feb 28 '20 at 15:39
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This is like asking 'why do the central banks continue to prop up the global economy with quantitive easing'? Because they have to otherwise we all end up in the dark ages, and the dark ages is what a free market would deliver.

You are asking a question but providing the answer at the same time. Berlin is freezing rent hikes to prevent rent price explosion. What you seem to be doing is suggesting that the free market should be given reign regardless in a thinly disguised ideological statement.

The notion of a free market.... in an economy where a dozen central banks create the credit needed for everyone to survive, at the behest of a handful of national governments , and where 100 or so firms produce nearly everything the whole world consumes , and where less than 10 corporate leaders own most of the mass media, and where 2 nations alone hold 99.9 % of the destructive military power of the world....is a ridiculous naive fantasy.

There is no free market. So as a question on face value, it should be closed as you provide your own answer. As an ideological statement, or question as to why Berlin is abandoning the free market, the question is also out of place because there was no free market to start with, and any decrease in regulation would only lead to further inequality.

Frank
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  • Interesting, but if this is an answer and not a comment, it needs to address the actual question as worded more directly. – agc Feb 28 '20 at 03:06
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    @agc yeah. I think the question is an oblique way of saying "the free market should be given free reign" because OP answers his own question, literally providing the answer in the Euronews quote – Frank Feb 28 '20 at 07:41
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    @Frank I think this is the beginning of a valid answer but it needs to be elaborated a lot. We've all been told the free market is good for us. Why, specifically, is that a lie? – Reasonably Against Genocide Feb 28 '20 at 13:09
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    (If the "leftist government is stupid" answer can get upvotes, so should this one...) – Reasonably Against Genocide Feb 28 '20 at 13:09
  • @user253751 Re "why ... is that a lie": leading question. A widespread error could be a lie, but it could also be a mistake -- which mistake might be honest, careless, traditional, illusionary, etc.... – agc Feb 29 '20 at 04:27
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    This is true, but I don't think the military power of the USA is why they introduced rent control, nor is quantitative easing. – gerrit Mar 01 '20 at 00:03
  • @user253751 updated – Frank Mar 01 '20 at 22:21
  • @gerrit noone is suggesting that – Frank Mar 01 '20 at 22:23
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Look what happened to cities like London. The "free market" rules brought benefits only for the speculation. Why? Because houses in London are marketed as an investment good, not as a place for people to live in. The main problem in London is that people from all over the world have been persuaded to buy there, few years ago when the wave of Russian buyers was ebbing the Chinese came in. How can a market set fair prices when some people have to buy out of necessity but there are also a lot more who buy for an investment, thus inflating the demand? How can a market set fair prices when the space to place the goods to sell is naturally limited while the buyers coming from all over the world don't have the same limit?

A lot of people already knew this, they knew that in Berlin the same could happen and they the started preparing their speculations shortly after the fall of the Wall. When the new buildings eventually were completed a lot of newspapers all over the world started writing that Berlin was cool (how many articles about how Berlin is cool!), that Berlin had very cheap housing and that it was a great place to invest in real estate. The speculation worked and the prices were eventually inflated.

You can call it capitalism, but it is a capitalism skewed by big media that can push all the buyers to pile on the same place inflating the prices. Furthermore in the real estate sector they can exploit the combination of people who buy out of necessity and people who buy out of gullibility, thus making a lot profits.

The people who live in Berlin are still paying the price for this speculation, some rents might be frozen, but relocating or buying will require ever increasing expenses.

FluidCode
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As a person who lived in Berlin for 5 years I can tell you that the situation went completely crazy in that short period of time.
If you rent a 1 room flat in Berlin and you have the minimal allowed salary then you have nothing to eat after you pay for electricity and heating.
I'm a senior software developer so I could afford that but what for? I left this otherwise amazing city because of costs.
I understand the free market but what was happening was just rush to make Berlin a city of rich only people.

ElmoVanKielmo
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There are many good answers already, but I think it is valuable here to consider the political history of Berlin, which affects the present-day political discourse.

Berlin is not like Munich, Frankfurt, or Hamburg.

Between WW II and 1989/1990, Berlin was divided in West and East.

West Berlin was a capitalist enclave in communist-controlled East Germany. It was popular with left-wing people. Firstly, there was no military service there. Secondly, since a natural economy could hardly develop in such an enclave with difficult logistics, the government was quite generous with public subsidies. A good place to be an artist living in a squatted home living off public money. This developed a left-wing culture.

East Berlin was the capital of East Germany. The state owned all housing.

After the reunification, everything changed in Berlin. Overall for the better, almost everyone would say, but as the special status for West Berlin dropped away and the new government invested heavily in East Berlin, gentrification set in. Housing in East Berlin was either demolished, redeveloped, or privatised. The housing along the street that was one day built as the Stalinallee, now Karl-Marx-Allee, became an object of capitalist speculation, where some companies made a lot of money without laying a single brick of housing (of course this was made possible by political decisions). The symbolic meaning of this is significant.

But Berlin still has a strong left-wing political culture, and a majority of voters vote on the left. They don't want the Berlin of the alternative cultures to disappear even more. They don't want Berlin to become like other cities, where the poor are driven out with rents of €20/m²/month or more. They inherently distrust large corporations speculating with real estate and many would be happy to see them disappear completely. Yet they know Berlin is hip and trendy that this will only increase further, for example, with Tesla building a megafactory on the outskirts of Berlin (technically in Brandenburg state, but explicitly due to the proximity to Berlin).

An ongoing popular initiative proposes to revert the privatisations of the 1990s and expropriate the big capitalist landlords that gobbled up the privatised housing in the 1990s (most of which was built by the communist state and not by private companies). As this is too radical for the centre-left social-democrats in the city government (and I think the greens are also hesitant), the red-green city government settled on rent control as a moderate compromise.

In a nutshell — why did they settle on rent control?

  • Because expropriation was not politically achievable, and
  • because they want to keep rents low, and
  • because voters believe letting the market set the price would drive poor people such as artists out of the city or prevent them from moving in in the first place, but voters want to keep such people in the city, and
  • because there is always a degree of NIMBYism (or Tempelhofer Feld would have seen some good affordable housing built already), and
  • because they don't trust economists telling them what to do.
gerrit
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Minimum wage is also against market forces, but the government intervenes for various reasons. Why not let market forces decide minimum wages? Market forces place minimal value on plebiscite mental health and debt.

Freezing of rent caps is not very different from enforcing minimum wage. it sais "eviction and debt due to limited real-estate have to be weighed against landlord profit"

In the USA markets can charge $2500 dollars for a day's hospital visit and other market de-restrictions have social consequences that are not acceptable in Europe.

USA grid road design is more adaptable than European cities with complex road geometry, The work/residence/traffic ecosystems are too complicated to be governed by markets, i.e. parks would not be economically profitable, traffic would be chaos, there would be no zone demarcation, planning permission would be subject to payment, rather than local consensus. The cities require long term strategy.

Socio-economic ecosystems with complex traffic, commuting, shopping and work-zone routes, cities can be degraded by market forces, creating social stress, higher traffic, longer commuting times, short-term chaotic development.

bandybabboon
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    I think paragraph 4 only makes sense if you define "well-governed" to exclude those things - if the city sprawls more than it needs to, due to an abundance of parks, is that a good thing or a bad thing? I don't think "complex road geometry and boundaries" has anything whatsoever to do with markets. (You could say they result from having a free market in road layout in the past, unlike some USA cities that lie on a grid, but I don't think they affect the market) – Reasonably Against Genocide Feb 27 '20 at 12:34
  • @user253751 Road geometry, I mean "urban planning" markets are not motivated by urban planning, which means that the more the city is ruled by buying and selling dynamics, the less urban planning happens. green spaces have a big beneficial effect on health. central park has 38 million visitors per year... https://www.google.com/search?q=green+space+mental+health – bandybabboon Feb 27 '20 at 12:53
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    Some city parks charge for access. In Volkspark Potsdam, visitors pay €1.50, discounted, winter, or transit price is €0.50, if caught without a ticket fine is €3.00. Kids are free. – gerrit Feb 27 '20 at 13:02
  • Parks would not be economically profitable? Do you have any idea how much more you can charge for a flat near a park? In the cases I've seen in Prague, a simple park with quarter the area of the whole development easily doubles the price of the property. Giving up a quarter to earn twice as much sounds pretty profitable to me. Planning permissions were and are always subject to payment - only instead of being an open transaction everyone can judge and use, it goes to the political power deciding on the planning. Why do you think consensus matters less on a market? – Luaan Feb 27 '20 at 13:31
  • @Luaan Once people have bought their property (for double the price) you can then build a new building where the park was and get your quarter back. – Reasonably Against Genocide Feb 27 '20 at 13:38
  • @user253751 ... you can build a new building on property you don't own? How? – Luaan Feb 27 '20 at 13:38
  • @Luaan You own the whole development including the one quarter which you set aside for the park, right? – Reasonably Against Genocide Feb 27 '20 at 13:40
  • @user253751 Sure. You buy it, build it up, and then you sell it, because that's your business. What else do you want to do with the development? The only other thing you could do is rent it, which makes it even more desirable to keep the park going. I mean, this kind of thing doesn't need some great powers of prescience or prediction - that's how it actually works in the real world, today. If a neighborhood doesn't have parks, absent regulation, it shows a preference for more housing compared to the preference for parks. People's values are quite subjective that way. – Luaan Feb 27 '20 at 13:56
  • @Luaan You need to keep the 1/4 as a park until you sell all your new apartments because otherwise those apartments are worth less. Once you sell all the new apartments, either you sell the 1/4 to another property developer (for the price it's worth with apartments on it, which they will develop) or you build those apartments yourself and sell them (for the price they are worth without a park next to them). – Reasonably Against Genocide Feb 27 '20 at 14:09
  • @user253751 That's an interesting approach. Why would the new owners agree to that? You're not selling the whole park to one person, it's just part of the property you're buying with the flat (e.g. you own a flat, 4% of the building, 2% of the parking area, 1% of the park etc.). Alternatively, it's owned by a company representing the owners. This isn't exactly rocket science. – Luaan Feb 27 '20 at 14:31
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    @Luaan When you buy a flat, do you normally also buy a share in all nearby parks? Somehow I doubt it. – Reasonably Against Genocide Feb 27 '20 at 15:05
  • @user253751 It's not a nearby park, it's part of the property. And if it is a nearby park, that's probably because it's already owned by a cooperative (or the city). Maybe it's not the same way where you live, but that doesn't mean there's no solution to the problem. Since you're claiming parks aren't economically profitable, it's quite enough to point out an example to the contrary, as gerrit and I have :) – Luaan Feb 27 '20 at 15:15
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    @Luaan So it's actually not the existence of a park nearby that doubles the value of an apartment? – Reasonably Against Genocide Feb 27 '20 at 15:46
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    Actually, minimum wage is a harmful concept too, as it breaks down the market equilibrium and disproportionately affects small businesses. Something like guaranteed income would solve the underlying problem a lot better. – JonathanReez Feb 27 '20 at 17:13
  • Minimum wage puts a base value on work time, it provides an incentive to work at all. Guaranteed income is good also, and it requires policing to ensure people aren't spending it on alcohol and drugs or involved in anti-social behaviour. 60-80 percent of people support some kind of minimum wage. If average income and average happiness are both measured, it's not a bad centrist mix of socialist and conservative. – bandybabboon Feb 27 '20 at 17:27
  • Property development speculation is done in assistance with banks. Property developers don't invest alone. They use banks to coinvest, take equity and risk, and the bank's issue mortgages to the buyers. The buyers spend this new credit on local suppliers of services and goods, and that stimulates the local city economy. In turn the local employers get wage slaves tied to their mortgages. Talking about parks in Prague, free markets, or other such nonsense just means you don't know what you are talking about. I was personally involved in huge development deals. I do. – Frank Feb 27 '20 at 22:20
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    Work slaves supporting banking loans sounds like a bad idea to me... what is the conclusion of the statement? Is Berlin's central area heavy on property development? re-development, at best, it's very rare to knock down 1950's buildings in berlin probably, it's not very high-rise. Same in london, 98% of the housing is georgian and only requires internal renovations which don't need mortgages. – bandybabboon Feb 28 '20 at 00:43
  • @Frank I no longer take this "more money stimulates the economy" argument for granted. People do not want money, they want food, shelter, water (basic necessities) followed by luxury goods. They want money to the extent it helps them get luxury goods. But if the extra money comes with a side effect of making shelter more expensive, it might actually decrease the amount of luxury goods they can have. That is why "stimulating the economy" is not automatically a good thing. – Reasonably Against Genocide Feb 28 '20 at 13:02
  • (Sure, in the end state of redevelopment, the available houses are nicer and the supply is the same and the demand is the same so the rent should be the same for nicer houses. In the transient condition, though...) – Reasonably Against Genocide Feb 28 '20 at 13:03
  • @Frank Also I should point out that I have nothing against property redevelopment. The thing people hate is price-gouging on rent. Not redevelopment. Redevelopment is only hated if it has the effect of decreasing supply or increasing rent. (Usually rent control laws have an exception for redevelopment, so redevelopment always increases rent, so it's always hated, but they didn't have to increase the rent and then they wouldn't receive hate) – Reasonably Against Genocide Feb 28 '20 at 13:07
  • @com.prehensible There are not many tall buildings around the Berlin city centre. There are some. Mostly they tend to be on the outskirts of the city centre (which is fine because of the public transit) and still not all that tall. I guess to get tall buildings you need very high property values which this is explicitly intended to prevent. – Reasonably Against Genocide Feb 28 '20 at 15:40
  • @user25371 I completely agree (stimulating the economy). Today however the QE stimulus is essential and has been since 2007. Today's economy is a pre-crisis banking-centric model, where the banks have failed and the main source of credit (=money) creation is the central banks. For example, look at the net amount of credit creation (QE) vs actual economic 'growth' . The approx. 2% growth figure is much less than the state credit creation rate. Withdrawing that credit supply would send the growth rate into negative figures. – Frank Mar 03 '20 at 10:46