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

Question

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?

Answer 1

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.)

Answer 2

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).

Answer 3

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.

Answer 4

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.

Answer 5

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.

Answer 6

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.

Answer 7

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.

Answer 8

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.

Answer 9

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.

Answer 10

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.