Berlin’s Five-Year Rent Freeze Explained
Joel Dullroy breaks down the radical new policy
It’s an exciting time to be a Berliner, with the city about to embark on the most radical experiment in housing policy in the world. Residential rent prices are to be frozen at their current level for five years, and may even be reduced. Landlords could face fines of up to €500,000 if they are caught overcharging. The free market for rented property could be over. The revolution has arrived in Berlin, at least temporarily.
Here’s what you need to know about Berlin’s five-year rent freeze, and some predictions about how it could play out.
1. It could be killed in court
The rent freeze, officially called the Mietendeckel, was announced by Berlin’s left-leaning ruling coalition on June 18th and will come into effect in January 2020. The reforms will be backdated, meaning rents are effectively already frozen.
The rent freeze will cover all residential rents, except for some social housing apartments that already have low and controlled rent. Properties built after 2014 are also excluded – an important exception which we’ll come to later. But the freeze is already thawing: from 2022, landlords will be able to increase rent along with inflation at 1.3%, and prices in some newly renovated buildings can also creep up.
The coalition is also introducing a maximum rent cap for newly signed rental contracts. This will be fixed at as little as €3.92/sq m for some old flats, up to a maximum of €9.80/sq m for modern flats (in context, new rental contracts are being signed for an average of €10.34m2). This would incentivise landlords to keep old tenants happy in their flats, rather than the current practice of annoying or tricking them out.
Landlords are freaking out, screaming ‘socialism’ and promising to sue the city back into the neoliberal 90s.
Residents paying more than 120% of the capped amount will be able to apply to have their rent reduced. All of this also applies to furnished flats, closing a loophole that has allowed landlords to get around previous rent regulations.
If this all sounds too good to be true, then you’re probably a renter (and 85% of Berliners are). Landlords are freaking out, screaming “socialism” and promising to sue the city back into the neoliberal 90s. The new law is sure to be challenged all the way to the constitutional court. Legal opinions for and against it are flying fast. Most notably, the Bundestag’s research office says it thinks the cap could be unconstitutional because the federal government should regulate rents, not states such as Berlin.
The Berlin Senate itself admits the concept is “new judicial territory,” but insists the law will be legally solid and survive any challenge. In the worst case, it says, the old rent regime will continue. Perhaps they think there’s nothing to lose by trying.
And what about small-time landlords who stand to lose money? The coalition says they could apply for “hardship” permission to continue charging the old rent. But profit-making won’t be allowed.
2. Investors may flee, but should we care?
Business leaders and their political servants are terrified of Berlin’s awaited rent revolution. And no wonder – they’ve invested billions in Berlin property, most of it leveraged on the assumption that rent prices could be continuously jacked up by 5% a year (or more, with a few tricks).
The Berlin Chamber of Commerce (or IHK) has called the rent reforms an “economic catastrophe.” Deutsche Wohnen, the biggest single investor in Berlin property, says the Mietendeckel is “a frontal attack on the rule of law.” Rather than regulating rents, politicians should issue a “moral appeal” to landlords to exercise restraint, said one real estate analyst.
The CDU (in power federally, but not in Berlin) has instead proposed paying subsidies to cover rent increases. This would effectively reward landlords indirectly with public money, instead of stopping rent hikes.
But the most revealing reaction of all came from Maren Kern, head of the lobby group BBU, whose members own 43% of Berlin property. It was her plea that landlords be allowed to at least increase rents along with inflation. If they would be happy with just 1.3% extra a year, why have they been demanding so much more?
For years, the biggest driver of Berlin’s skyrocketing rents has been investors snapping up existing apartments and boosting the prices.
The threat in the air is of a Randian-style capitalist strike, where investors pull their money out of Berlin to teach the city a lesson. To which many renters would say “good riddance.”
If investors do rush to sell off their Berlin properties, it would result in downward pressure on property prices. Others would then have the chance to buy. Berlin’s public housing companies are eager to purchase private properties, and since 2015 the city has bought 1,671 apartments using its right of first purchase. Most recently, it bought 670 socialist-built-later-privatised flats on Karl-Marx-Allee, bringing them back into public hands. Should prices fall, this instrument will become more viable.
Residents, too, could step in to buy what investors no longer want. Over 10% of Berlin apartments are already held by housing cooperatives (Wohnungsbaugenossenschaften), which are resident-owned, non-profit entities. Renters could band together to create new cooperatives to buy their buildings and replace their fleeing landlords, using low-interest government loans.
For years, the biggest driver of Berlin’s skyrocketing rents has been investors snapping up existing apartments and boosting the prices. This has done nothing to create jobs or value; it has simply extracted wealth from citizens, leaving them with less disposable cash to spend in the city. Local businesses have had to increase wages to help employees pay rising rents, thus pushing up prices. If investors flee, prices should relax and the city should become more affordable.
3. Houses won’t fall apart – we’ll fix them ourselves
Free-market economists have long warned against rent caps, saying they discourage landlords from maintaining their properties, leaving tenants to live in slums. Even cuddly capitalists like Paul Krugman sell this line. And indeed, in Berlin the IHK is already threatening that landlords will reduce maintenance spending.
But it’s not as if uncontrolled rents have resulted in high-quality housing. Many Berlin buildings haven’t seen a lick of paint in decades. Market logic encourages landlords to reduce costs. And with so many people searching for flats, there’s no incentive to improve them.
Many Berlin buildings haven’t seen a lick of paint in decades. Market logic encourages landlords to reduce costs.
Berlin’s houses won’t fall apart under a rent freeze, and here’s why: in Germany, landlords are legally obliged to keep their properties orderly and fix problems. Should they fail, tenants have the right to reduce their rent. They can do so by writing a letter detailing the problems, then simply paying less rent until it’s dealt with. Further, tenants can repair their own properties and send delinquent landlords the bill – either directly or by reducing their rent.
If houses get too slummy, the state can forcibly seize them. This is happening now in Steglitz-Zehlendorf, where a building left empty and dilapidated for more than 20 years has been taken over by the district government. It will be renovated and rented out. If the owner wants their property back, they will have to pay back these costs. Across Berlin, another 20 derelict buildings could be similarly appropriated.
Could Berlin’s housing stock increase in quality once landlords get out of the way?
4. New houses will still get built by the city, not investors
The rent freeze will result in less new houses – so say opposing political parties, such as the neoliberal FDP. But private investors have long failed to build enough flats in Berlin under free market conditions.
It’s true that Berlin is already plagued by a lack of new properties. Back in the early 2000s, the city was issuing as few as 3,000 building permits a year, creating a massive shortage that fuelled today’s housing crisis. Things have improved, with 24,218 building permits issued in 2018, but of those, only 16,706 apartments were actually built last year alone. Overall, there are an astounding 58,990 issued building permits not being used.
Why is that? One factor is a lack of building industry workers, but a greater factor is speculative investment. Property investors have been buying land, obtaining building permits, then flipping the vacant property at a profit, without contributing a single new flat to the city. Some wait for years to watch the value climb. In one case, a massive property in Spandau by the river Havel with permission for 500 flats has been left fallow since 2013. Investors can hardly threaten to build less flats – they build so few already.
But in the rent-freeze future, new buildings will get finished. That’s because investors will be incentivised to shift their money. Until now, they’ve been buying up existing properties to profit from rent hikes, seemingly low-hanging fruit when compared to building. Under the new law this will cease to be profitable. However, rents on newly built apartments will be exempt from the new rent controls. Suddenly, new builds will become the only option for profit-seeking tycoons.
Where investors refuse to build, the state can step in. Berlin has six public housing companies which are actively building new flats, and have plans to construct 30,000 by 2021. They could build a lot more if investors offload their undeveloped land. Unlike investors, public landlords aren’t driven to return a profit to shareholders. They can build high-quality flats and rent them at affordable prices, with many reserved for low-income tenants.
New Houses Will Still Get Built By The City, Not Investors
Other actors are also emerging as property suppliers. Deutsche Bahn is planning to build apartments on its vast supply of inner-city railway land, partially to provide affordable homes for its employees.
Of course public agencies need to be better funded to pay for such investments, but that’s a political decision. With interest rates at or below zero, it would be easy for the German government to take out no-risk loans to fund such social infrastructure.
Berlin’s rent freeze is likely to be extremely popular with voters, most of whom are tenants. Berlin’s coalition – a combative yet dynamic partnership between the SPD, the Greens and Die Linke – is polling favourably. Politicians in other cities are already paying attention. It’s only a matter of time before federal politicians wake up and realise that rent reform is a vote winner.
In the worst case, should no new houses be built, Berlin will be in the same position it is in today. New arrivals will have to find accommodation in less popular areas, such as the tower blocks of East Berlin or in periphery suburbs. It’s not ideal, but neither is today’s situation in which your income level determines your access to central housing. Housing allocation always involves someone not getting what they want. Under this new system, the rich have as much or as little chance at getting their preferred flat as the poor.
5. Subleasing could get ugly
Berliners have nothing to fear from the rent freeze but themselves. With landlords defanged, tenants will be tempted to assume their power. Main tenants (Hauptmieterinnen) could be increasingly tempted to act like mini-landlords, offering rooms to new arrivals at inflated prices.
Although they could be fined for doing so, some will no doubt try to take advantage of unwitting foreigners desperate for a bedroom.
Already, many Berliners are experiencing the ugly side of small-time rentier capitalism via the greed of their fellow housemates. “I discovered I was paying all the rent, while my housemate was paying nothing. He was living off me,” a colleague recently recounted. He moved out promptly, no doubt to be replaced by another victim.
Don’t be a rent leech.
Some Berliners seem to think it’s okay to overcharge newcomers, perhaps as some kind of compensation for years of rental injustice. It’s not. Tenants need to show solidarity. We can’t fix the city’s housing affordability problems by copying the immoral exploitation of landlords. We’ve got to do better.
Main tenants should be obliged – socially or legally – to show their subletters their original rental contract and justify the amount they’re asking. Furnishings are no longer a valid reason.
Public shaming needs to occur of those found treating their housemates like cash machines. We need to come up with a snappy phrase to encourage Berliners not to act like parasites, one that can be graffitied and hashtagged until the message sticks.
How’s this: “Don’t be a rent leech.”
The great Berlin housing experiment begins
It’s worth remembering that the rent freeze only came about because of grassroots activism by citizens fed up with political inaction. The Deutsche Wohnen & Co Enteignen (or Dispossess Deutsche Wohnen & Co) campaign shook the system with its demand to forcefully repossess all apartments owned by large private real estate companies. It was the SPD’s federal member for Mitte, Eva Högel, who in early 2019 first published the idea of the Mietendeckel, then seen as a more politically palatable concept than dispossession. It goes to show: we need to demand extreme reforms just to get a moderation.
Berlin is entering a political period as thrilling and unpredictable as the post-Wall era, when everything was in flux and up for grabs. And we’re all here to witness it. Academics will write reams about this policy and its impact. If the sceptics are right, it could all end in disaster. For residents, it could hardly be worse than the status quo in which central flats rent for a thousand euros and sell for half a million. Let the great Berlin housing experiment begin.
* This feature was subedited by Dan Cole.