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Berlin’s rent controls have slowed house building

More on the ‘cosmopolitanism‘ of economic theory, this time from Germany.

In a story titled ‘Berlin rent freeze shakes foundations of city’s construction sector‘, the Financial Times explains how:

Packed out with Brexit refugees, international party people and wannabe tech entrepreneurs, Berlin is in expansion mode, its population growing by 40,000 a year…Rents have doubled over the past decade, as new residential construction fails to keep up with soaring demand.

Simply out, demand is rising relative to supply. That is the problem. That “affordable housing remains scarce” is a symptom of that problem, it is not the problem itself. The solution to the problem is to build more housing, which isn’t easy in Berlin where builders are “already unnerved by excessive bureaucracy and long planning delays”.

Sadly, Berlin’s policymakers have drawn a different conclusion; they propose to deal with the symptom, not the problem. The Berlin city government plans to freeze rents for five years. 

The law will freeze rents at the mid-2019 level for 1.5m flats built before 2014. For new rental contracts, it imposes an upper limit based on the age of the building and the quality of its fittings, ranging from €3.92 to €9.80 per sq m. Tenants whose rent is significantly above the upper limit can apply to have it lowered.

Remember, the problem is a shortage of the supply of housing relative to the demand for housing. The Berlin city government’s rent freeze will add not a single unit of housing to the supply and will, thus, do not a single thing to remedy the underlying problem. 

Indeed, it might make things worse. An old but excellent and still sadly relevant book titled Verdict on Rent Control examines episodes from a number of countries and finds:

[I]n every country examined, the introduction and continuance of rent control/restriction/regulation has done much more harm than good in rental housing markets—let alone the economy at large—by perpetuating shortages, encouraging immobility, swamping consumer preferences, fostering dilapidation of housing stocks and eroding production incentives, distorting land-use patterns and the allocation of scarce resources—and all in the name of the distributive justice it has manifestly failed to achieve.

We see this happening in Berlin now.

Landlords have stopped all major building work, plunging tradesmen such as bricklayers, plumbers and electricians into crisis. “They’ve basically stopped doing everything but emergency repairs,” she said. “You’re seeing the first cancellations, with investments originally planned for this year declining dramatically . . . and order backlogs shrinking fast.”

The warnings of a slowdown have been rife, both from the private and the public sector. The BBU, a trade association that groups private and state-owned developers in Berlin and Brandenburg, says its members expect to lose €1.1bn in revenue over the next five years, invest €5.5bn less than planned and reduce construction by at least a quarter as a consequence of the rent freeze.

There is good reason that 81% of economists agree that rent controls are bad policy. The Berlin property market is just one more example.

John Phelan is an economist at the Center of the American Experiment. 

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