Some Positive Outcomes from Berlin's Rent Controls

Bloomberg’s artful omission of new construction data in its analysis of Berlin's new rent control law

Bloomberg opinion columnist Andreas Kluth had a piece last week on the “disaster” of Berlin’s new rent control measure. The new measure, passed in 2019 and put in place in 2020, covers housing units built prior to 2014, but not new homes, and allows existing leaseholders to negotiate reduced rents.

Kluth’s piece on the new law begins with a nod to horseshoe theory that should tell you most of what you need to know about the analysis that follows: “If populism on the political right corrupts democracies, populism on the left ruins economies.” But before getting into all of that let’s start with the actual study that Kluth is using as fodder for his gimmick.

What was the actual study?

The Bloomberg piece cites figures from a new study1 by some folks at the Ifo Institute in Munich. The study method was pretty simple: in effect what they did is grab snapshots of all of the urban apartment listings on the German version of Zillow, called Immowelt, each quarter, for a few years. Then they grouped all of the listings into three categories: rent-controlled Berlin, unregulated Berlin, and listings from other cities which function as the control group. Finally they put the data into a spreadsheet and made a few charts. It’s a 7-page report, nothing too complex.

This is not a criticism of the method per se—grabbing the data and making a chart is a great way to find out how something is going. But one of the more obvious flaws in the research is in fact noted by the authors themselves in a footnote Kluth neglects to mention:

When interpreting these results, the underlying data and the premises of the analysis to be considered. When it comes to the data it is about offers to rent and buy, not those actual contracts. In addition, they are advertisements on immowelt.de, and not necessarily representative of the real estate market as a whole. In particular, commercial providers in our [data may] be overrepresented in the sample.” (via Google Translate, emphasis mine)

For the sake of understanding Kluth’s thesis, we’ll just take for granted that the data provided is a perfect sample of Germany’s urban housing market and move on.

Survey says

Taking things for granted, the survey does show some interesting trends in the housing market that pretty clearly correspond to changes to the law. First, we see that the prices of listed rent controlled units have dropped nearly 60%. One gimme takeaway from this is that discretionary income for the people who live in rent controlled units should go up accordingly, and presumably those people will be using the money for consumption and savings rather than for paying economic rents to a property owner. That’s good, and should have some non-negligible stimulating effects in the Berlin economy.

We also see unregulated rents rising, but not very dramatically at all compared to the drops in regulated rents. Kluth describes this in a curious way: “[Rents] Rise Even Faster in the Unregulated [Apartments]”, which makes it sound like unregulated rents are rising faster than regulated rents are dropping. The data clearly show that this is not the case (60% drop for regulated rents, 9% increase for unregulated rents), so if we are reading closely, we should assume Kluth means unregulated rents are rising faster than they were before the policy was enacted. Clever wording, though.

One thing Kluth will not show you is the authors’ actual charts which contain the error bars. For the first two quarters of 2020, a 1% rent increase was within the 95% confidence interval, which doesn’t seem like too big of a deal. There is a clear upward trend for 2020, and the confidence interval now shows a 5-12% increase since 2019, but that doesn’t seem like a huge deal either, especially considering an important dataset that we’ll get to shortly.

There’s one other important figure to note from the report: the decline in listings for rent-controlled apartments. Kluth frames this as “There Are Almost No Regulated Apartments Available Anymore…”, which is quite a stretch. Indexed to the time the policy was announced, the listings for rent-controlled units are down 50%. Now obviously that is a significant decrease, but framing it as “almost none” is just disingenuous.

Beyond the odd framing, you’ve also got to look at the main implication of a decline in listings: longer tenures. What’s clear from these data is that people who live in rent controlled apartments in Berlin are staying put in their homes for longer. This is also a good outcome. It is bad2 for people to move often3 as children, and we should be disincentivizing it. From the looks of this report, the rent control policy is doing just that.

The big question is, will the pace of new construction be enough to keep the prices down on new, unregulated units? The economic wisdom says no—builders are disincentivized from building in this environment. Kluth accepts this wisdom on its face without any investigation, or at least without mention in the piece.

Building permits

The big piece of missing evidence is new construction permits. We know that prices for unregulated apartments are edging upwards. Common sense would say that there will be an increase in the number of building permits to take advantage of that fact.

The theory, however, is that rent control disincentivizes construction. And this year we also had the coronavirus pandemic which created some bottlenecks in parts of the construction sector. Nonetheless, Berlin’s residential construction permit data for 2019 and 2020 shows no fall in production—and in fact shows a 3% increase for the January through November period of the year (last November being the most recent month for which data is available).4

Despite both the pandemic and the new market-killer law, permits for new housing are up in 2020. An increase in new homes production will work to flatten some of the modest price increase the authors show in the unregulated market segment, and help open the city up to new residents. An obvious question is whether the new construction will keep pace with these trends over time, but the fact that both the rent control law and the pandemic did not tank new construction is surely a setback for tired economic thinking on rent regulations.

Extrapolating

We know that rent control can protect tenants from displacement due to rising costs, but with a design like Berlin’s, can it incentivize new construction at the same time? Kluth’s selective evidence would have you believe that the answer to this question is no, but the construction data so far points to a different story. Maybe in 2022 when we have another year of price and construction data I’ll revisit this. Until then, don’t buy Kluth’s fearmongering: the Bloomberg opinion pages have been wrong before and will surely be wrong again.

1

The study is in German, but you can translate the whole PDF into English on Google Translate if you want.

2

Oishi, Shigehiro, and Ulrich Schimmack. "Residential mobility, well-being, and mortality." Journal of personality and social psychology 98.6 (2010): 980.

3

Webb, Roger T., Carsten B. Pedersen, and Pearl LH Mok. "Adverse outcomes to early middle age linked with childhood residential mobility." American journal of preventive medicine 51.3 (2016): 291-300.

4

Baugenehmigungen in Berlin November 2020, Statistik Berlin Brandenburg.