Red-red-green fiasco: the rent cap is a stupid idea

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With the rent cap, the Berlin Senate has catastrophically overshot the mark.

Politically, one can understand the desire to give tenants in Berlin a “breathing space”, as the Senate puts it.

Income in the capital is well below the national average, but rents are well above.

As far as this income-rent ratio is concerned, the city has now almost reached the Munich level.

Many tenants in Berlin - and that is the vast majority of around 85 percent of households - have lost all freedom of movement.

It is understandable that they wanted to do something there.

"Housing is an existential question and must not be determined by fear," says the Senator for Urban Development and Housing, Sebastian Scheel, rightly.

However, a price cap is wrong.

It's not even a price cap, but a time machine that turns the market clock back about seven years.

Because in Paragraph 6 of the Rent Cap Act, upper price limits are set, which are based on the rent index from 2013.

Landlords must adhere to this price cap, otherwise they face a fine.

The rent cap is a prohibition law, it applies to 1.5 million apartments, and in at least 340,000 of them the rent had to be reduced in November.

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The Senate has thus completely overridden the price mechanism in the market and destroyed considerable trust.

The red-red-green government should have expected that all variants would be sued at the Federal Constitutional Court.

Until the decision is made in Karlsruhe (which should not be the case until the second quarter), tenants and landlords are moving in a legally completely insecure area.

The housing market is not a normal market

Even more, it could be that tenants - of all customers, who are particularly worthy of protection from the Senate's point of view - have to pay the reduced rental amounts in the middle of the pandemic and in economic uncertainty.

Many small landlords are also in trouble, some of them have tight calculations and, unlike large corporations like Vonovia or Akelius, cannot simply evade and sit out.

However: the housing market is not a normal market like any other.

There are several aspects that make it a special market and why the price does not fall through a rapidly expanded supply, as is the case with vegetables or bananas.

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First: The number of apartments in central locations that are affordable for average households is naturally limited.

Plots are full at some point.

And yet it should be possible that normal earners can also find a place in the city and not, at the end of a long price development, only top earners or second home owners.

That should be consensus in a social market economy.

Second: the real estate market is inelastic, inflexible.

Even if economists like to think of it that way: The tenant is not a market participant according to textbooks.

Citizens do not simply move from one part of the city to another or to the outskirts overnight because they find a suitable price there.

An apartment is the center of life, the children go to school in the area, friends live nearby.

That means: If you want to take advantage of the housing shortage in a central location and increase the rent to the maximum possible through modernization or other means, you have to deal with an opponent who has only limited possibilities to react.

If one of the market participants is completely taken advantage of by the other, one speaks of market failure, which is also in the textbook.

It takes years before a new offer is created

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Third: cities and metropolitan areas will remain central points of attraction in the years and decades to come.

The development towards a service society continues, and the ideas for it arise in urban areas.

Of course, more apartments have to be built there.

However, it takes a lot of time before the housing supply can be expanded, especially in Germany with its long planning paths (which could certainly be shortened).

And even if a new offer has arisen on the outskirts of the city, problem number one still remains, namely: normal earners should also have a place in the city.

What should happen to them when they are threatened by displacement - the supporters of the pure supply-demand theory have no answer.

Fourth: The housing market has been a popular investment destination since the beginning of the low interest rate policy, both among professional and small investors.

The rising purchase prices are putting pressure on rents.

However, these rents are mostly paid by people who cannot afford property.

To a certain extent, retirement provision with rented apartments is a redistribution of wealth.

The higher the rent, the better for the landlord's retirement provision, the worse it is for the tenant's retirement provision.

Even if economists claim otherwise: in reality it is clearly recognizable that large property owners, such as public or cooperative landlords, charge completely different rents in one and the same residential area than private investors who have just entered the market at top prices, who want to modernize and optimize their returns.

These public and cooperative portfolio holders can operate with smaller rental income.

This means that it is not just demand that determines price.

The discipline of economics has so far completely failed to explain such specific behavior.

Anyone who tries to explain the housing market solely with linear supply-demand mechanisms and then makes recommendations for action is lazy to think.

The housing market is socially sensitive.

A city's success depends on having access to affordable housing.

Therefore it is right to regulate here.

By the way, every market is regulated: The stock market is strictly standardized and monitored.

There is a speed limit on almost all roads, and firearms are largely prohibited in Germany.

In times of excessive investment pressure, high urban immigration and slowly rising incomes, it is right on the housing market to implement a speed limit.

It should just not look like the rent cap, but could be based on economic realities.

For example, one could link the price increase in existing and new leases for a certain period of time to the development of general inflation or to construction prices.

In addition, the state would have to subsidize investments in climate protection and accessibility in a more targeted manner and with grants so that there is no investment backlog in such phases.

That would be a procedure that would even meet with approval in large parts of the housing industry.

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