Berlin’s new rent cap, first steps towards affordable housing

Ursula moved to Berlin to work as a UX developer four years ago, going through the excruciating process of finding a place to live. Her journey went from unfortunate situations in flatshares to short stay apartments. In March 2020 she experienced her last move in the middle of a pandemic to a studio apartment where 51% of her income will be spent in rent. After four years in the city, she realised that every time she went on a flat hunt, prices would have doubled and opportunities were more scarce.

Even if Berlin rents are not amongst the most expensive in European cities, the Global Residential Cities Index reported that in the past five years Berlin rent prices rose by 69%.  As a measure to mitigate what is considered a housing crisis, the German capital Senate approved a rent cap law that aims to freeze prices at the cost registered on June 18, 2019, for the next five years. A measure that aims to benefit 3.1 millions Berliners who are home renters and represent 85% of the city’s population.

The path towards an example of how rent control can benefit tenants and relieve a housing crisis is still to be defined, since the controversial law is yet to be approved by the federal constitutional court. Landlord associations and investors count on the federal government to declare it unconstitutional as they argue it violates the freedom of the market and the right to make a profit.

Housing block in Karl-Marx Allee. Source: author

Why Berlin?

After the fall of the wall in 1989, Berlin was considered to be ‘reborn’ thanks to the 1990’s urban underground cultures. The so-called creative class played an essential role in the local urban restructuring process that ended up having the city mayor describing Berlin as “poor, but sexy” in 2001, when living costs were considered particularly low amongst world capitals.

From 2010 onwards, the local government pushed towards a transformation of the city into an inclusive and diverse startup ecosystem. The traditional working-class and migrant neighbourhoods like Kreuzberg experienced the consequences translated into a radical change, tangible in the ethnic composition of the areas.

Like most cosmopolitan cities Berlin faced a rapid population growth, reaching an average of approximately 40,000 people moving into the city per year. New contracts and short term rentals allowed rents to increase, having old Berliners experience one of the most rapid rent increases in Europe.

According to the Financial Times, in 2001 Berlin had a vacancy rate of 5 per cent; by 2017, that had dropped to 1 per cent.

Rent cap precedents

Rent cap has been amongst the housing expropriation activist agenda for quite a while. The groups have been expressing their claims since 2015, based on article 15 of the German Constitution, which states that land may be transferred to public ownership for the purpose of nationalisation.

The non-profit Rent-watch (Mietenwatch) registered that only a few private housing companies control a significant part of the rental apartment market and thus also influence the price formation on the market. The rent-watch identified ten housing providers with the most online offers in the German capital. The property company Deutsche Wohnen alone owns over 100,000 apartments in Berlin.

The association states that living space is traded as a commodity as they found out that rent prices depend mostly on the housing provider.

The non-profit also found that “private providers hardly rent apartments below 10 € / m²” even if Berlin’s average rent is of 6.72 €/m² before the establishment of rent control. In addition to the lease, it is noted that some of these companies charge very high additional management costs, an average of € 3.98 / m².

While the Federal Statistical office states that the average Berliner spends 28.2% of its income in rent, Mietenwatch reported that only 4.4% of apartments are affordable for a single individual, based on the city’s average monthly income.

What does the law actually say?

The law stipulates that rent increases are banned for the next 5 years except for 1.3 % inflation scheduled for 2022. This means that old contracts cannot raise their prices, existing tenants can apply for a rent decrease and new agreements are not allowed to exceed 10% of the average price which is settled for € 9.80m².

Still to be approved by the federal court, this law would have effect in November 2020 and will exclude subsidised public housing and apartments constructed after 2014.

One of the main concerns regarding rent control is the negative effect it can have on renovations and housing improvements. The law permits reformations as long as these do not raise the rent by more than € 0.50 m².

If landlords decide to keep increasing the rent price, the violation of the law is punished with a fine as high as half a million euros. The measure may seem drastic, but it contemplates that only 5 % of the property is owned by small owners, and most property is managed by larger companies.

The law holds a particular clause for pensioner households and landlords whose primary source of income is rent. They can increase the prices if it is proven that they are not making a profit out of it.

The rent cap, however, is more complicated than only charging €9.80 per square meter. Landlords have until April 15 to provide tenants with a letter that states their rental conditions such as the age of the building, energy usage and particular features.

A group of legal experts called Wenigermiete have become relevant actors in the calculation of rents, since they claim that 90% of renters are eligible for a rent reduction. The association developed a free online tool which allows tenants to calculate the potential cost reductions with the implementation of the rent cap.

Housing block in Karl-Marx Allee. Source: author

Will the local government have the capacity to enforce the law?

Although most Berliners are pro-rent cap, there is still scepticism on whether the law will actually become effective. The capability of the local government to enforce the law is put in doubt and landlords keep trusting a lack of capacity amongst authorities to find and fine all law violators.

Housing providers turn to the easiest way to avoid the regulation: renting to foreigners moving to Berlin for the first time. The floating population enters a hypercompetitive market without knowledge, time or legal tools and this can lead to desperate measures, making them both victims and scapegoats for the increase in rent prices.

Experts claim that the lack of capacity to enforce the rental cap law may lead to the growth of a grey housing market.

What is the current discussion among rent cap detractors?

The owner protection association “Haus und Grund” bet for the federal government to stop and reverse the law, their main argument is that this is an “entry into an ever more extensive state intervention spiral to hide the self-created problems on the housing market”.

Haus und Grund’s opinion coincides with that of the Christian Democrat party and Berlin-Brandenburg Association (UVB). Their argument is that rent control will lead to a lack of investment from real estate developers, housing production will decrease, and existing flats will be in a deteriorated state.

The rent cap is also criticised by building and housing cooperatives who claim that it might bring uncertainty in the market. These groups find that their existence will be threatened since their user’s fees are already below the market price, and the rent increase is a tool that allows them to modernise, provide maintenance and build new housing blocks.

Amongst the detractors, there is a proposal for the federal government to create “a fair housing market” by opening the market to new investment and housing development. However, the existing housing shortage has already caused Berlin Real Estate investment to record the highest transaction volume in Europe of around 3.11 billion euros with private and public funds, followed by Copenhagen with 2.43 billion euros.

In short, the housing shortage is non-exclusive to Berlin; it is experienced in almost any major capital city, the difference is how activists and the government in Berlin decided to deal with it. The establishment of rent control in Berlin opens a relevant discussion for big cities facing gentrification, displacement and excessive rent charges. A rent cap may be only replicable under a similar governmental composition (left-green coalition) and consistent pressure from activist groups. The Berlin case brings to the table a relevant discussion on fair policy and housing provision in cities facing similar problems. Not leaving aside the fact that, even with stringent laws, there is always room for a grey market that puts tenants into hazardous situations. Also, if Berlin managed to set a precedent with this so-called radical regulation,  affordable housing might involve a longer process than what it seems.

As for Ursula, if the law is activated, she might be able to reduce her rent to a third of the price she is currently paying.