With the support of the Atlas Network, CapX is publishing a new series of essays on the theme of Illiberalism in Europe, looking at the different threats to liberal economies and societies across the continent, from populism to protectionism and corruption.
The dramatic rise in house prices is one of the stories of our time. Between 2000 and 2010 low interest rates fuelled house price bubbles around the world. In the U.S, it was this bubble bursting that led to the subprime crisis, which in turn triggered the global financial crash. Only very few developed countries seemed to be immune to spiralling house prices and rents, one of which was Germany, which remained a place of peace and stability with rents and prices barely rising in the years leading up to 2010, in stark contrast to other countries.
Rising rents and house prices
After 2010, the situation changed. The German housing market experienced sharp rises in house prices and rents, especially in major cities such as Berlin, Munich, Frankfurt and Hamburg. These developments were driven by a number of factors. Most importantly, more and more people started moving to German cities. Initially, the newcomers came from other cities and regions across Germany. But as the euro crisis gripped the continent, growing numbers of southern Europeans also arrived in Germany. And finally, starting in 2015, a large influx of immigrants began arriving as a result of Angela Merkel’s policy of open borders. Over a million migrants arrived in Germany in 2015 alone, both war refugees and immigrants who came for economic reasons. In each of the following years, many hundreds of thousands followed in their footsteps.
With such high levels of migration into Germany’s major cities, large numbers of new apartments needed to be developed. Unfortunately, this did not happen. The number of new dwellings built was nowhere near enough to satisfy the sharp rise in demand. The main reasons for this substantial shortfall are Germany’s strict building regulations and slow approval procedures. In Berlin, for example, it currently takes 12 years to draw up a land-use and development plan, which in many cases is a prerequisite for any new construction. In addition, ever tighter environmental regulations have made construction more expensive.
Driven by a lack of supply and rising construction costs, rents and house prices have risen sharply.
The rapid decline in yields in the rental housing sector was also accelerated by the European Central Bank’s zero-interest rate policy. I know the effects of this personally: In 2004, I bought an apartment building in Berlin-Neukölln at a price-to-rent ratio of 6.8. Ten years later, I sold it at a ratio of 24. Today, I would be able to sell the same property at a ratio of over 30.
Rental price brake
Politicians initially reacted to rising rents by introducing what they dubbed the “rental price brake” in 2015. Until then, rent adjustments had only been limited in law for existing tenancies – landlords were not allowed to increase in-place rents by more than 15% over any three-year period. However, when an existing tenant moved out, the landlord was free to negotiate a higher rent with the new tenant. The CDU/CSU and SPD coalition government changed this when they passed a new law in 2015: When re-renting apartments, landlords were only allowed to charge a rent that did not exceed 110% of the “local comparative rent”. The new legislation did allow one major exception: newly constructed apartments. Without this concession, the construction of new housing would have completely stalled. However, the legislation contained a number of ambiguities – for example, the term “local comparative rent” was not defined. There were numerous lawsuits and a host of court rulings. However, rents continued their upward spiral because the underlying causes of the housing shortage had not been eliminated and many landlords did not adhere to the new law anyway.
As with all state intervention, thoughts quickly turned to even stronger regulation. This is a textbook example of the “spiral of intervention” described by the economist Ludwig von Mises 90 years ago: When state intervention fails to achieve the desired results or, as is often the case, actually makes the situation worse, demands for even stricter regulations follow. And this is exactly what has been happening in Germany for some years now. Lawmakers started by tightening the rental price brake and, before the ink was even dry on the newly amended version, calls emerged for even tighter restrictions. This process is aptly described using the example of the Berlin, which has become the focal point of the housing policy debate in Germany.
Why Berlin is rediscovering socialism
First, rent and property price increases have been particularly strong in Berlin, which is largely due to the fact that they started from such an extremely low base compared to other German cities. In 2010, the average rent for an existing apartment in Berlin was an incredibly low €5.21/sqm per month. Even with recent increases, it is still only €6.72 today.
Second, Berlin is governed by a coalition of three leftist parties – the SPD, The Left and the Greens. Senator Katrin Lompscher, who is responsible for construction, is a leading figure in The Left party – the successor to the communist SED, the ruling party in East Germany. She joined the SED in 1981 and one of the first things she did upon becoming Berlin’s Building Senator was to appoint Andrej Holm as Secretary of State, a man who had previously made a name for himself as a great admirer of Hugo Chavéz and Venezuela’s housing policy. Holm was soon forced to resign when stories about his past role with East Germany’s infamous Stasi secret police started to emerge. Nevertheless, he continues to advise the government on housing policy to this day.
Berlin’s Senate has done little to nothing to address the true causes of the city’s housing shortage. On the contrary. The number of development plans has actually halved during Senator Lompscher’s term in office. Investors were vilified as enemies and everything was done to put obstacles in their way. Naturally, the housing crisis got worse and rents and prices continued to rise.
This is when the “spiral of intervention” began. Ever larger swathes of Berlin were designated as “social protection areas” – there are now 57 of them in total. In these areas, property owners’ rights are severely restricted. In fact, they need advance permission from the authorities for almost any and every modification to the property they own. Even the installation of a second wash basin or an extended bathroom can be deemed a “luxury” and forbidden. In addition, the state has increasingly been exercising its right of first refusal and using taxpayers’ money to buy apartment buildings at massively inflated prices. In the past three years alone, 49 apartment buildings have been bought with tax proceeds in order to “remove them from the open market”, as politicians have said.