Rents fell for a while but now they’re up again. A new report examines why.
About a month after the introduction of new rent-control laws across Berlin last June, the cost of new contracts for rental apartments across the city started going down. But while many cheered the news, a month is a pretty short span to judge a new law’s efficacy. Now that 2015 has drawn to a close, a new report from property firm CBRE finds that prices for new rental contracts in Berlin have in fact gone up.
Not by much. The year-on-year rise across the city for 2015 was 5 percent, a reduction on the previous year’s rise of 6.5 percent. Most of this rise, however, happened before the new rent law—called the Mietpreisbremse or “rent price brake”—emerged on June 1. After the law hit, new rents did fall for a few months, but according to the CBRE report, rents rose again in November and December.
Could this be a sign that the law has failed? Not necessarily, but it does suggest the law isn’t working in exactly the way it should.
Before looking at why, it’s important to understand how the law is supposed to function. American readers might read the words “rent control” and assume a system akin to that in New York, but Berlin’s new law is rather different. Its theoretical intention was not to halt rent rises but merely to slow them down—to prevent galloping rent jumps that could see Berlin residents priced out of their neighborhoods within a year or so. This turnover could cause rampant instability in a city where rental tenants overwhelmingly outnumber owner-occupiers, who made up just 15 percent of city residents in 2012.
The law—the first of many being rolled out across Germany—supposedly works like this: a rental observatory calculates the typical rent per square meter for a given area. Since not all apartments are equal in condition or quality, the rental observatory creates different rates for the area, for homes deemed “simple,” “medium,” or “good,” also factoring in the building’s age. Over the following five years, no new rental contract is allowed to exceed these rates by more than 10 percent. Existing rental contracts, meanwhile, are already protected from rises above this rate. One reason the law was introduced is to iron out a discrepancy by which older tenants got very cheap rent while their new next-door neighbors paid through the nose.
There are exceptions to these rental limits. If a house is renovated at a cost that reaches beyond a third of what it would cost to construct a new building, the 10 percent rise limit is waived. The same goes for new buildings constructed after October 2014. What isn’t allowed, however, is upgrades that allow landlords to convert “simple” apartments into “good” at a knockdown rate, then using that as a way to skirt the rent-rise limit.
This might sound like a recipe for a rundown housing stock, but a key qualifier is that Germans typically rent their flats unfurnished. If you move into a flat with a new kitchen, for example, it was frequently put in not by the landlord but the tenant, who may either take it away with them or ask you to buy it.
The law could slow down huge rent jumps, useful in a city where recent hyper-gentrification has seen some areas’ rents leap by up to 45 percent in a year. There are, however, some serious issues. First off, the rents calculated by the observatory do not accurately reflect real market rents. Rather, they’re consistently lower, as Julius Stinauer, associate director at CBRE, tells CityLab.
“The rent observatory takes the rents of the last four years, and then it calculates the median for different apartments by age and quality,” says Stinauer. “But this methodology doesn't always include a good range of apartments in the calculation. Usually you have more municipally owned apartments within the survey, making it biased towards the lower end of the market, while in Berlin an apartment costing more than €8 per square meter wasn’t considered valid for the survey. This excluded all the very expensive rents, so the methodology doesn't really represent the market.”
This pricing failure exacerbates another key problem. The observatory rent is not enforced by the city, except when a tenant takes their landlord to court. For a nice apartment, many tenants are prepared to turn a blind eye to a higher rent. For those who are genuinely unhappy, the path isn’t easy. Suing a landlord is a time-consuming process that can cost several thousand euros. Such small cases are common in Germany but they are still a deterrent.
“Some landlords are ignoring the law because they know there's a big demand in the market and in good locations, there's always somebody that wants to pay a little premium to get the apartment,” says Stinauer. “Furthermore, it's actually very complex to take your landlord to court.”
The report’s statistics seem to support the idea that it is premium rents that are causing the spike. Throughout 2015, new rents for Berlin’s cheapest 10 percent of flats rose by just 2 percent. Among Berlin’s most expensive to percent of apartments, the rise was a rather larger 5.7 percent. The initial drops that the report noticed between June and November are, Stinauer suggests, most likely due to landlords cautiously waiting to see how the law played out. When they realized that the law would in fact be toothless, business returned to normal.
Berlin’s rental conditions are still better than those in many cities. Its recent plans to cap rents for social housing tenants at a third of their income, for example, should still give many lower-income Berliners a level of security that residents elsewhere can only dream of. That doesn’t mean rent rises aren’t marching on regardless, or restricting themselves to certain areas. The past year has seen sharp rises in farther-flung places once dubbing terminally humdrum, such as the Northwestern borough of Reinickendorf.
The issue of whether or not rental laws like Berlin’s can function effectively is complex. Stinauer insists that it’s too early to see what the ultimate consequences will be. Within this complexity, there’s nonetheless a simple lesson to be learned: without effective enforcement in place to make sure it’s observed, a law isn’t really a law.