Lessons from Germany on the adverse effects of rent caps

The housing shortage and rising rents are an increasingly pressing problem across the globe. In many countries, the left is proposing a rent freeze: an attractive solution for those having to cope with soaring rents and a shortage of available flats. Economists know, however, that it does not work. As early as 1992, a survey by R.M. Alston, J.R. Kearl and M.B. Vaughan found that 93 per cent of economists agreed with the statement that ‘a rent cap reduces the quantity and quality of available housing’.

A new study now shows that this is exactly what happened in Berlin, where the rent cap introduced in 2020 has produced the consequences that the vast majority of economists had predicted almost thirty years earlier. From 2016 to 2023, the city was governed by a left-wing coalition (and following Die Linke’s victory in last September’s elections, it may soon be governed by one again). On 23 February 2020, that government introduced the so-called ‘Mietendeckel’, literally a ‘rent cap’: put simply, the measure froze rents and obliged landlords whose rents exceeded certain legal limits to reduce them. Depending on the year of construction and the characteristics of the flat, the maximum rent ranged from 3.92 to 9.80 euros per square metre per month, excluding utilities and heating, subject to certain supplements. In his doctoral thesis on housing policies and market dynamics, defended at the Schumpeter School of Business and Economics at the University of Wuppertal, Pekka Sagner analysed a vast amount of data. The result is clear: rents have indeed fallen by 10.3 per cent, but the supply of flats available to rent has plummeted by 52 per cent. In some central districts, such as Charlottenburg-Wilmersdorf and Mitte, the decline reached or exceeded 60 per cent, whilst in the suburbs, for example in Lichtenberg, it was less pronounced.

In short, where rents have fallen the most, the supply of properties has also fallen the most. Two- and three-bedroom flats, ranging from 50 to 80 square metres, have been hardest hit. It is couples and small families who have paid the highest price. Furthermore, with lower rents, landlords have cut back on maintenance costs, which were no longer sustainable. As the number of available properties continued to dwindle, tenants were even willing to accept run-down flats (following the introduction of the rent cap, adverts for refurbished properties fell more sharply than those for other types). Finally, some landlords withdrew their flats from the rental market, converted them into freehold flats and sold them to prospective buyers, further reducing supply. The Mietendeckel was short-lived. The Federal Constitutional Court declared it unconstitutional: according to Germany’s highest judicial authority, individual Länder cannot legislate on matters already regulated at federal level. In many parts of Germany, however, another form of control remains in force, the so-called ‘rent brake’ (Mietpreisbremse): less restrictive than the Berlin model, it has produced similar negative effects, as other studies demonstrate.

In the end, even the tenants who had initially benefited from the scheme ended up bearing the brunt of it. After the Court declared the Berlin rent cap null and void on 15 April 2021, landlords were able to claim the difference between the rent reduced by law and that stipulated in the tenancy agreement. Many tenants were asked to pay, in a single instalment, sums they believed they had saved – sometimes amounting to several thousand euros. This was a devastating blow for those who had already spent that money and suddenly found themselves having to settle substantial arrears. Critics had predicted this, but even this warning had gone unheeded.