Last year, the city of Berlin agreed to a five year rent freeze for some 1.5 million flats constructed before 2014. The way it was initially approved is that it would freeze rents at mid-2019 levels and allow for only 1.3% inflationary increases. All of this is being challenged in the courts, but the Financial Times is suggesting that it could still come into force by March 2020. Here is an excerpt from a recent article. (Guy Chazan isn't holding back about the kind of people that he believes Berlin attracts.)
The legislation, which should come into force by March this year, is City Hall’s response to a lingering housing crisis that shows no sign of easing. Packed out with Brexit refugees, international party people and wannabe tech entrepreneurs, Berlin is in expansion mode, its population growing by 40,000 a year. Yet affordable housing remains scarce. Rents have doubled over the past decade, as new residential construction fails to keep up with soaring demand.
As I mentioned before on the blog, these policies are not intended to apply to new buildings. That would surely choke off new construction, which would only exacerbate the underlying supply issue that Berlin is facing. But not surprisingly, this move has also put a freeze on capital expenditures, according to the same FT article. Local trades are complaining that, "It's as if someone's just turned out the lights."
Last week's general election in the UK was yet another example of the urban-rural divide that we are all seeing emerge around the world. Taking a look at this chart from the Centre for Towns, it's pretty clear that the type of community someone lives in (i.e. how urban), says a lot about the way in which they probably voted. In big cities, the vote share was 49% Labour. And in villages, communities, and small towns, the vote share was about 48-58% Conservative.
But what does this stem from? According to John Burns Murdoch of the Financial Times, the biggest predictor (for constituencies) of a swing vote over to the Conservatives during this last election was the share of the population in a blue collar job. Here is a graph from John's article. Circles with a black outline are constituencies that changed hands last week. Note Great Grimsby, which I wrote about here, in the top right corner.
These facts probably aren't all that surprising to most of you. But it is an important reminder of how concentrated the new economy is becoming in big -- or perhaps I should say, certain -- cities. The Brookings Institution recently referred to this as "a crisis of regional imbalance." Because it's not just a case of urban vs. rural. Brookings found that from 2005 to 2017, more than 90% of innovation sector growth in the US could be traced back to just five metro areas. (You'll be able to guess most of the five. Only one stood out for me.)
This is the world we live in.
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.