Re-starting construction is the only way to fix the housing crisis
As the late Swedish economist Assar Lindbeck memorably put it, “In many cases rent control appears to be the most efficient technique presently known to destroy a city – except for bombing”. And yet that’s never kept economic populists from passing new rent curbs.
One of the most radical such attempts, watched by cities all over the world, was enacted last year in Berlin. This week, however, Germany’s constitutional court ruled that the law is null and void. In the short term, this will cause even more chaos in the city, forcing many tenants to pay back rents. Worse, the judges’ reasoning won’t put the controversy to rest but stoke it instead, making rent controls an unfortunate hot-button issue in this election year.
Over a year ago, Berlin’s all-left government of the Social Democrats, the Greens and The Left – a party that largely descends from East Germany’s communist regime – passed a batch of rent caps. For all buildings erected before 2014, rents were frozen for five years at what they had been in June 2019. Rents defined as excessive were reduced.
Economists all over the world rolled their eyes. Rent controls, like all price fixing, cannot address the fundamental problem of a mismatch between supply and demand – only more supply can do that. Instead, caps simply create shortages in place of high prices.
Using charts from the Ifo Institute, a think tank, I showed the consequences unfolding in Berlin while the law was in place. Only one group benefited from capped or lower rents: existing tenants of old apartments, even the well-heeled ones. Everyone else lost, either paying even higher rents or being locked out of the market altogether.
That’s because tenants of regulated apartments stopped moving out, and the few units that did come on the market were sold in a hurry rather than re-let by their landlords. The overhang in demand – all those frustrated house hunters – converged on the unregulated units, whose rents soared even faster than before. Many found no accommodation at all.
Meanwhile, several opponents of the legislation were suing in the courts. Some focused on fundamental issues such as the law’s impingement on property rights. But the case before the constitutional court in Karlsruhe – brought by politicians from the centre-right Christian Democrats of Chancellor Angela Merkel and the pro-business Free Democrats – pursued a different logic.
What it argued and what the judges confirmed was that in Germany’s federal system the 16 states, including Berlin, have no business legislating matters that are already covered by federal law. And there’s already a lot of national housing regulation, albeit less ambitious than Berlin’s attempt. Because the city-state’s law conflicted with federal statutes, it therefore never took effect.
This verdict will satisfy few people and enrage many. Many tenants now have to pay arrears for which they didn’t save. This could become social dynamite. Moreover, the rent controls’ creeping long-term distortions of the market won’t now become visible, allowing the radical left to perpetuate the urban myth that they would have saved Berlin’s struggling tenants, if only conservative adversaries and judges hadn’t interfered.
Already, politicians of the three left parties have concluded that the answer to this week’s court verdict is to go ahead with the same draconian rent controls at the national level. They will make this one of their rallying cries leading up to the election of Sep. 26, alongside calls for new wealth taxes – also ruled unconstitutional in Germany in the 1990s. The hardliners of the three left parties will wage a campaign that’s economically illiterate and populist.
This will put moderates on the centre-left in an uncomfortable spot. In particular, the two charismatic and thoughtful leaders of the Greens, Annalena Baerbock and Robert Habeck, were rather hoping to steer clear of the old pseudo-Marxist propaganda. They want to get to grips instead with the pandemic and with their core issue of climate change. And they want to stay open for coalitions in all directions, even with the center-right. Now they’ll have to appease the lefties in their own ranks.
As I said in my previous critique of Berlin’s rent controls, populism on the right corrupts democracies, but populism on the left ruins economies, and thus livelihoods. Germans of all mainstream affiliations should recall what’s made them prosperous since Ludwig Erhard, the post-war economics minister and second chancellor, established the country’s “social market economy”.
The way to fix the housing crisis in Berlin and other cities is to allow and encourage more construction – not to return to the planned economy that impoverished East Germany and East Berlin until a generation ago.