A rent cap in Berlin led to a collapse in supply.
In February 2020, the left-wing coalition running Berlin introduced a rent cap. The cap varied with the type of construction, age of the building, and so on, but even if the size of the cap varied with the nature of the home, it was still a cap. Landlords who had been charging “too much” were obliged to reduce rents. Some rents fell.
Writing for Britain’s Institute of Economic Affairs, Rainer Zitelmann reports on a new study showing what ensued. Brace yourselves:
The supply of rental apartments collapsed, falling by 52 per cent. In some central Berlin districts, such as Charlottenburg-Wilmersdorf and Mitte, the supply of available apartments declined by 60 per cent or more. In outlying districts such as Lichtenberg, the decline was less pronounced.
Astonishing!
One reason for the shortage was that some former landlords removed their apartments from the rental market and put them up for sale.
Who could have anticipated that?
Meanwhile, apartments that were available tended to be in worse shape:
Landlords reduced spending on maintenance, as such spending was no longer economically viable at the lower rents. Moreover, because the supply of available apartments had fallen so dramatically, tenants were increasingly willing to rent apartments even when maintenance had been neglected. Following the introduction of the rent cap, the supply of rental apartments explicitly advertised as renovated declined more sharply than the supply of unrenovated apartments.
Unexpectedly!
Ultimately this law was ruled unconstitutional. The city had trespassed on territory where it did not belong, “as federal states do not have the authority to regulate matters that have already been regulated at the federal level.” Moreover, tenants who had benefited from the reduced rents were obliged to make up “the difference between the legally capped rent and the rent originally agreed upon in the lease,” which left some of them being hit with a big bill.
Zitelmann notes that “critics had warned of precisely this risk, but their warnings had also been ignored.”
When it comes to rent control, this is all too often the case.
Never underestimate the extent to which the political value of an idea to those advocating it can outweigh consideration of its economic consequences.
(Speaking of which, a new Berlin rental property disaster may be in the making. More on that to come.)