After rental prices in Germany’s capital doubled in the last decade, Berlin government announced in October 2019 on freezing rental prices for five years. The mayor was proud of his accomplishments for the residents. Berlin residents expressed joy after months of demonstrations against raising rents in the city.
The representatives of the municipal coalition, approved the decision, valid for apartments built before 2014, at a joint meeting. The Social Democrats, the Greens and the Di Linke Party – all affiliated with the economic left in Germany.
As part of the proposal, they partially excluded furnished apartments. Major casualties will be short-term rentals through services such as Airbnb that will impose stricter restrictions.
The laws in Berlin, where 85% of the apartments are for rent, are even tougher than other European cities. The new law in Berlin will be applied retroactively from June 18, 2019. Landlords who raise prices in the past few months will have to lower prices and return money to his tenants! Those who fail to do so will be fined € 500,000.
The main sufferers are the real estate companies operating in the city, such as Vonovia and Deutsche Wohnen. They warned of the serious implications of the move on the Berlin housing market.
The protesters dismissed their claims as false allegations driven mainly by economic interests. Many experts said that imposing a restriction on rental prices in cities could hurt the real estate market.
Prices raise after renovation
Landlords may raise apartments rental prices if they renovate them. For raising more than half a euro per square meter, they will require special approval from the authorities. In addition, private homeowners can modestly raise rental prices if they prove to be in financial distress.
In Berlin, rental companies own most of the rental properties. This section is intended to facilitate private tenants who have a low number of rental properties. In any case, the rate of rent increase will not exceed 5%.
The Berlin Tenants Association praised the agreement. They claim that rent restriction is “a historic step and a unique opportunity to develop national regulation for the benefit of tenants.” This signifies the union, which works with similar unions in other cities.
Rental prices jump
The rent-freeze initiative, aimed to alleviate tenants suffering from real estate boom tide – which caused city rental rates to double in recent years. Average rental prices in Berlin in 2012 were 7.1 euros per square meter. In 2019 it reached 11.2 euros per square meter – a 58% jump.
In some neighborhoods that have enjoyed accelerated development in recent years, such as Kreuzberg and Friedrichshain, the increase was higher. The sharpest decline is in the number of cheap vacant apartments at prices of 5-8 euros per square meter.
Method of calculation changed
This is not the only step that Berlin is taking to fight the rise in city rents. The Berlin government (one of Germany’s 16 federal states) announced it would buy back 6,000 apartments that belonged to public housing and were sold to private hands.
Berlin’s state-owned real estate company sold these apartments in 2004 for 405 million euros, and it now buys them back for 920 million euros. Now, the number of apartments by the public housing company will reach some 68,000 apartments.
Germany made more extensive changes changes the method of calculating the taxation of property in the country. Thus, owners of 36 million properties in Germany will be required to recalculate the value of their assets in Germany, and in the case of Berlin they will probably be required to pay higher taxes.
Berlin has an apartments shortage. With low interest rates, investors searched for profitable yields, so the real estate market in all European countries was booming. In addition, local residents were outraged that the excess tourism in the city and the growth of short-term rental apartments hurt the fabric of life in the German capital.
Pros and Cons
Other European cities, such as Barcelona and Madrid, are planning to approve new rental restrictions soon. New York has recently reached an agreement to limit rental rates and even Florida is discussing the issue.
The benefits of such laws are clear, at least on paper. The real estate market is growing, and the “poor” tenants living in a rented apartment are protected from landlords’ greediness. But regulation in this area violates the very basic principles of free market.
Opponents of the Berlin plan say the solution to the problem is much simpler: build more. According to data by the Free Democratic Party in Germany, the Berlin population is growing by 50,000 every year, but from 2011 on average, There were only 10,000 apartments built in the city each year.
In addition, some published studies in the world claim that it is not at all clear whether these laws are beneficial to tenants, or whether they are harmful and harm entire neighborhoods and cities.
Experts warn that a rental restriction will lead to the neglect of existing apartments and lack of investment in new apartments in the city. This is exactly what happened in London until the city’s rent restrictions in the eighties were abolished. By than, there was already a severe housing shortage. In Berlin’s case, the new law may worsen the existing housing shortage.