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Lessons From Berlin’s Rent Control Experiment

Lessons From Berlin’s Rent Control Experiment

In the U.S., we’ve known for some time now just how destructive rent control policies can be. Failed experiments in Cambridge and San Francisco left residents with fewer housing options and higher rents in the non-controlled units, while disincentivizing the construction of new housing altogether. But new evidence from across the Atlantic Ocean demonstrates just how structurally unsound and destructive rent control policies are — regardless of geography.

Berlin has faced housing affordability challenges for some time now. Like many large cities in Europe, recent influxes of residents have far outpaced the construction of new housing. Instead of pursuing solutions that work to correct this imbalance, such as reforming zoning laws and cutting red tape to reduce barriers to construction, Berliners instead voted to impose a five-year rent cap on all units built before 2014.

It’s been a year since that cap was instituted and housing is no more affordable than it was then. As to be expected, freezing rents in the larger, rent-controlled market also froze the mobility of residents into and out of these units. This reduced upward mobility, paired with an adverse construction environment, led to shortages of units across the controlled market, and a surge of demand in the non-controlled market. Rents in Berlin’s non-controlled market have grown by over 6% since the policy was enacted – outpacing rent growth in Germany’s 13th next largest cities. This matches what researchers saw in San Francisco, where rent control was found to have led to a more than 5% increase in rental prices.

Similar to San Francisco, rent controlled apartments have also become worth less than their peers in the non-controlled market. Since March 2020, Berlin’s controlled units have lost 8% of their total value. As a result, many concerned property owners have since fled the market and sold their units instead of re-listing them on the rental market – leading to less supply overall.

Everywhere rent control has been implemented, it has led to higher rents in the non-controlled market, degradation of housing in the controlled market and less rental housing overall. The same fundamental problems that make rent control untenable in the U.S. make it untenable in Germany, New Zealand and any other community struggling with housing affordability. As German Real Estate Association President Jürgen Michael Schick succinctly summarized: “The Berlin rent cap is the best example of how it should not be done.”

Instead of rehashing failed policies like rent control, we should be pursuing solutions that make it easier to build more housing at all price points and allow supply to meet demand. As we look to solve our own housing affordability challenges here in the U.S., we should take note of Berlin’s latest experiment with rent control and the peril that follows any policy centered on artificially distorting markets.

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