As housing affordability becomes an increasingly challenging and widespread problem in many US cities, there are growing calls for the imposition of rent control. While there’s broad agreement among economists that rent control is ineffective and even counterproductive, it still seems like a tempting and direct solution to the problem. In Oregon, State House speaker Tina Kotek has made repealing the state’s ban on municipal rent control laws one of her major legislative objectives for 2017. What happens when a big city imposes rent control? A new study of rent control in Berlin offers some insight.
Housing affordability has been a big issue in Berlin for the past several years. The city’s economy has grown due to an influx of young adults and the creative class, and the resulting demand has pushed up rents in many neighborhoods. And unlike the US, most Germans are renters, rather than homeowners–in Berlin, 85 percent of households rent their dwellings. As a result, there’s been strong political support for rent control. In June 2015, the city enacted its “Mietpreisbremse”– literally a brake on rents–setting a cap on rent increases. A new paper “Distributional price effects of rent controls in Berlin: When expectation meets reality” from Lorenz Thomschke of the University of Munster looks at what has happened in the first year since the law was enacted.
Berlin’s rent control ordinance is a complex one: it’s not a freeze on rents per se, but rather a limit on rent increases on existing rental units. The city has developed a complex formula based on an apartment’s age, size, number of floors and amenities, that prescribes a rent level and allows only modest increases over time. New construction is exempt from the rent control limits, and apartments that are substantially renovated are also free to charge higher rents as well.
The key finding of the Thomschke paper is that the initial enactment of the law has reduced rents in rent-controlled flats compared to those not included in the scheme, but the effects have been less than the law intended, and are the benefits of rent control are not evenly distributed among different types of apartments. He concludes that the biggest impact of the rent control law has been to lower the prices charged for the largest and most expensive apartments. So, paradoxically, while the law was aimed at easing affordability problems for low and moderate income households, the chief beneficiaries of the law to date have been upper income households. Tomschke concludes:
The original goal of the reform – more affordable rental housing for low- and middle-income households – has therefore not been achieved after one year of the MPB.
While Berlin’s rent control scheme is novel and complex, and the findings of this study may not be directly applicable policy proposals in the US, they are a stark reminder that while posed as a way of promoting affordability for low income households, in practice, rent control may actually provide greater benefits for higher income renters. High income renters may be more savvy in dealing with landlords and exercising their rights, and less subject to the economic dislocations that force low income households to move from rent controlled apartments. Over time, having acquired the “right” to live in a rent controlled apartment, some better off households may choose not to move, or to buy a home, with the result being a lower rate of turnover in apartments: further restricting the supply of housing.
We’ll continue to watch the Berlin experiment with rent control in the year ahead. Its likely to have important lessons for those contemplating rent control on this side of the Atlantic.