Politicians of all camps, from left to right, have been going on about the need to create affordable housing. At the same time, they do everything they can to keep this from happening. The so-called rent freeze – and I warned against it as early as last March, right here in this publication – was written into the coalition agreement between Christian Democrats and Social Democrats in December. Once introduced, it will choke rental housing construction in Berlin which is sluggish anyway.
The reason why residential rent rates have gone up in Berlin and other cities is perfectly obvious: more and more people are moving to Berlin, while the building activity has steadily declined. So if you want to do something against rent hikes, you should encourage development of new housing. Sounds plausible to you? Apparently not so to policymakers.
They do not seem to be familiar with the law of cause and effect. Rather, they love doctoring the symptoms (in this case the rent level) while ignoring the underlying causes. On the contrary: for many investors, the rent freeze will make rental housing construction even less lucrative than it used to be. But since the housing demand is increasing, most developers will actually step up their focus on condominiums. Low-income groups who cannot afford condominiums will in no way benefit from such a shift.
This is not to say policymakers are stupid. During the debate concerning the rent freeze, they did admit that the measure might cause housing construction to stall. So they came up with the brilliant idea to reintroduce the diminishing balance depreciation for new residential buildings in order to boost rental housing construction. During the coalition talks, however, the idea of the depreciation allowance was ultimately dropped, whereas the rent freeze remained in place and is supposed to be signed into law some time this year.
Politicians will be able to tell their constituency they had taken measures to combat runaway rents. Here and there, it might actually have a favourable short-term effect. The side effect of it, however, is that many property owners will downscale their investments in refurbishments and maintenance because the housing shortage will ensure they will always find a tenant either way.
Lower investments in the housing stock and fewer investments in rental housing construction: these are the predictable effects of the rent freeze. Friedrich A. Hayek, a winner of the Nobel Prize for Economics, repeatedly showed in his works that government intervention on the market frequently achieves the opposite of the effect intended by policymakers. And this is exactly the fate that the rent freeze will suffer.