Berlin rent controllers: tear down those rent controls!

A controversial rent cap to control soaring rents in the German capital Berlin has been scrapped by the country’s Constitutional Court.

The legislation had been welcomed by tenants, but panned by developers and landlords since it came into force in February 2020.

Since then, the rents of around 1.5 million flats in Berlin had theoretically been frozen at June 2019 rates.

The court ruled on Thursday that the Berlin government had overstepped its powers in introducing the law, as federal law governing rents was already in place.

Previous federal laws had “attempted to ensure a fair balance between the interests of tenants and lessors, interests that are protected by fundamental rights” meaning that “the [German states] are precluded from passing rent legislation in this regard,” an English statement from the court said.

The Berlin rent cap was therefore “void in its entirety.”

This is from Robin Powell, “German Constitutional Court scraps controversial Berlin rent cap,” DPA International, April 15, 2021.

HT2 Jon Miltmore.

As the article makes clear, this doesn’t mean there’s no rent control in Germany. What it means is that this particularly harsh freeze on rents was found unconstitutional.

In his article, Jon Miltmore writes:

To make matters worse, in the absence of a free market, a “grey market” had emerged, reports say. To compensate for lost rent, landlords had begun demanding tenants pay ridiculous prices for furniture, kitchen appliances, and other basic amenities as a condition of renting, Bloomberg reported.

“For example, there’s a chair here; it’ll cost you 15,000 euros,” said Thomas Schroeter of ImmoScout24, an online platform for residential and commercial real estate; “or this stove, it’ll be 10,000 euros.”

I do take issue with his first four words: “To make matters worse.” The measures he discusses make matters better. When buyers and sellers figure out ways around price controls, markets come closer to clearing. It would be better, of course, not to have the rent controls: these ways around are inefficient. But they are more efficient than a passive response to rent controls.

In one of the first lectures I ever saw by UCLA economist Harold Demsetz, one he gave at the University of Winnipeg in January or February 1970, he reported a study he had done of rent control in the Chicago market during World War II. One of the standard ways around rent control, he found, was to insist that the tenant buy the furniture. That was way better than the other typical response: discriminating against black people.

Miltmore, by the way, lays out other bad, though entirely predictable consequences of the Berlin rent control law.