Free Market Fundamentalist, Top Story

Berlin Shows How Not to Do Housing Policy

Freezing rents is a stopgap measures that ignores why rents are rising so fast in the first place.

Berlin Germany
The sun sets on the Saint Nicholas’ Church and town hall of Berlin, Germany, January 26, 2010 (Mika Meskanen)

If you’re trying to control housing costs in your city, don’t look to Berlin for inspiration.

The German capital is due to implement a five-year, across-the-board rent freeze in March. The measure is expected to save around 340,000 tenants money during that period, but it will come at the expense of housing affordability in the long term.

The German Economic Institute in Cologne estimates that Berlin’s policy will reduce the value of some properties by more than 40 percent.

A consequence of that will be underinvestment. The BBU, a trade association of developers in the Berlin and Brandenburg region, says its members expect to reduce investments by €5.5 billion and construction by a quarter.

Germany needs 350,000 new homes each year to keep up with demand. Only 286,000 were built in 2018. If the BBU is to be believed, that number will fall — driving up housing costs across Germany.

Berlin’s problems

Berlin needs to do something. Its population is growing by 40,000 per year. Rents have doubled in the last ten years. Landlords are accused of underinvesting in apartments, discriminating against low-wage tenants and jacking up rents.

But capping rents at €9.80 per square meter is an overreach that will most likely be counterproductive.

The national government is challenging the policy in the courts and there is a good chance it will be overturned.

Even if it is, some damage has already been done. Manja Schreiner, the managing director of the Berlin-Brandenburg builders’ association, tells the Financial Times:

Confidence in the legal system has been shaken, and when that trust is destroyed it takes a long time to rebuild it.

Regulation on top of regulation

The national government’s own inaction is partly to blame. It could raise the minimum wage, to help low-paid Berliners make the rent. It could incentivize international and tech companies, whose often expatriate workers push up demand for housing, to settle in other cities.

It could also make it easier to buy a home. Germans are typically required to pay up to a third of the cost of a house out of pocket, which is impossible for those on low incomes. Monthly mortgage payments cannot exceed 40 percent of net income. Unlike in the neighboring Netherlands and Switzerland, homeowners cannot deduct mortgage interest from their taxes. For the self-employed, there are more and stricter requirements. No wonder nearly six in ten Germans rent.

Berlin stands out: 85 percent of its population rents. Partly that’s due to a Cold War legacy of public housing. Rules that limit rent increases and make it impossible for landlords to evict tenants who pay their rent on time also play a role.

Life in Berlin is still cheaper than in other German cities, like Hamburg and Munich. Rents are half of what they are in London and Paris, which is one reason the city is so popular with expats.

Owners resort to shenanigans like classifying repairs as “modernizations”, which allows them to raise rents. That understandably leads to calls to close this legal loophole, but rather than add more regulation to solve problems created by regulation in the first place, it’s worth taking a look at how other cities cope.

Other cities

Housing costs in Amsterdam and Barcelona are rising for many of the same reasons as they are in Berlin. All are mid-sized cities, popular with university graduates and expats. None have a lot of room to grow (and people want to live in the city centers anyway).

In Amsterdam, more than one in two homes are social houses, owned by non-profit cooperatives that work closely with the government. The share of social housing has come down from 65 to 55 percent, because the city recognized that middle-income families were being squeezed. Paid too much to qualify for social housing but too little for a mortgage, nurses and teachers could no longer afford to live in the city where they worked.

Amsterdam is building more apartments in the private rental market, but prices are still too high for those on modest incomes.

The Dutch do have an effective and progressive housing benefits system, which is tied to both income and rent. 1.4 million Dutch households, on a population of 17 million, receive between €24 and €368 per month to help pay the rent.

Spain has a three- to five-year minimum on rental contracts to protect tenants against rent hikes. During that period, rents cannot increase above inflation. The downside is that landlords in cities where housing is in short supply, like Barcelona, will demand significant increases once contracts expire, forcing people to move out.

Barcelona is building more homes, but, with around 16,000 people per square kilometer, it is already one of the most densely populated cities in Europe.

This points to a solution for Berlin, which has under 4,000 inhabitants per square kilometer. Unlike in Amsterdam, where medium- and high-rise is not an option unless the city would tear down its seventeenth-century canal houses, Berlin could utilize its space much better.

Density

The average building height in Berlin is 13.4 meters compared to 10.7 meters in Munich and 9.1 meters in Vienna. The average building in Berlin has five floors against 3.7 in Munich and 3.1 in Vienna.

But Berlin’s floor area ratio — which measures a building’s floor area against the size of the plot upon which it is built — is lower than in those cities: 1.4 against 1.45 in Vienna and 1.48 in Munich.

Partly this is due to Berlin’s wide streets and many parks. But there are also unused and underused open spaces in Berlin that could be built up.

Existing buildings could also be used more efficiently. The average size of an apartment in Berlin is 70 square meters; comparable to Barcelona, but much higher than Amsterdam’s 49 square meters. Cold War-era flats in the former East Berlin tend to be smaller, though, while apartments built for families in the former West are typically larger. Space-wise, some of those could easily be split in two to accommodate singles and couples.

None of these solutions may solve Berlin’s housing problems on their own. There isn’t one simple answer. But there is a lot more Berlin could do than blame greedy property owners. Freezing rents treats a symptom of the city’s housing problems, not its causes.

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