comments 2

Berlin approves rent freeze on existing apartment buildings

Berlin just approved a five year “rent freeze” on apartments in the German capital. The rent caps will be implemented on January 1, 2020, but will apply retroactively to all rental agreements from June 18, 2019 onward (which is when the decision was made). It is estimated that this new law will apply to some 1.5 million apartments.

The move is in response to rapidly rising apartment rents, which grew about 12% in 2017 alone. So I can appreciate where this is coming from.

From what I have read, it will not apply to new construction, which is the first thing I checked when I saw the decision. That would have almost certainly choked off any new apartment construction in the city. With a capped top line, it wouldn’t take long for costs to increase and make new rental construction infeasible.

That said, a similar squeeze is liable to happen for existing buildings. It is one thing to cap rents (revenue), but what about utility, maintenance, labor, and other operating costs (expenses)? As costs rise and operating margins tighten, it can become exceedingly difficult to reinvest in, or even maintain, an apartment building.

For more on the announcement, here’s an article from FT.

2 Comments

  1. Jakob P.

    Well, expenses wouldn’t rise much more than inflation. A little more, but not much more. Assuming that rents already exceed expenses by a decent margin, a single year’s 12% rent increase may amount to, say, a 16% or 25% buffer for operating expense inflation. That should easily get you through a few years, especially if similar rent increases have been stacking up in the recent past.

    Like

  2. daniel b

    I find germany to be the strongest argument for the MOAR supply crowd. Housing prices were super stable for a long time, which everyone attributed to their planning framework and banking culture/regs. Those stable housing prices also coincided with a long period of extremely low, or negative, population growth. As soon as population growth really took off, so did housing prices, which to me suggests that it was low-ish demand for housing, and not those other factors, that constrained housing prices.

    Like

Leave a Reply to Jakob P. Cancel reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s