Berlin becomes first German city to make rent cap a reality
theguardian.com
theguardian.com
That new constructions are excluded from rent control.
Thing is I can't really find this in German media. Only British media seems to write gist of this new regulation, which seems quite odd.
[citation needed]
I think what you meant to say is that rent control is widely considered a failure by certain rich people who want to maximize their profit-seeking behavior without regard to societal cost, and economists of particular ideologies, who generally are unable prove their claims about real-world rent-control systems. Most other people like it, which is why it sticks around.
The people who complain about rent control in San Francisco, for example, have yet to provide evidence that it's doing anything but lowering prices here.
There's a lot of heat in this debate, but very little light.
The analysis of rent control is among the best-understood issues in all of economics, and -- among economists, anyway -- one of the least controversial. In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that ''a ceiling on rents reduces the quality and quantity of housing.'' Almost every freshman-level textbook contains a case study on rent control, using its known adverse side effects to illustrate the principles of supply and demand. Sky-high rents on uncontrolled apartments, because desperate renters have nowhere to go -- and the absence of new apartment construction, despite those high rents, because landlords fear that controls will be extended? Predictable. Bitter relations between tenants and landlords, with an arms race between ever-more ingenious strategies to force tenants out -- what yesterday's article oddly described as ''free-market horror stories'' -- and constantly proliferating regulations designed to block those strategies? Predictable.
http://www.nytimes.com/2000/06/07/opinion/reckonings-a-rent-...
But, of course: Paul Krugman. Rich dude maximizing profit-seeking behavior.
So this is a straw man. Most economists, when asked about rent control, default back to the one thing they know: price caps are bad. That's obvious. They don't agree to nearly the same extent when you ask them about the policies that actually exist. The more ideological economists then try to assert that all price manipulation is bad...usually without evidence of any sort.
Krugman's thinking is so sloppy here that it's a joke. He "didn't know anything" about SF housing until the day before he wrote the article, and it shows -- how can he plausibly claim that he knows that the rental bubble of the late 90s was due to rent control, when the region was the historic center of one of the largest economic bubbles of the 20th century?
He couldn't know, and didn't know. The tech bubble popped, the money went away, and the rental crisis ended. This one will end the same way. The high-order bit here is the tidal wave of new money, not the rent-controlled tenants that are drowning in the flood.
You told the commenter upthread that opposition to rent control was based on the desire of rich people to maximize profits from their real estate.
I simply responded by demonstrating that opposition to rent control is taught in economics textbooks as a basic illustration of the power of the law of supply and demand.
I'm not really following what San Francisco has done to repeal the law of supply and demand.
You posted a link that says that a whole bunch of polled economists don't like rent caps. That's unsurprising, but rent caps != rent control. I'm not aware of any city that has capped rents, because that would be stupid. San Francisco does not cap rents.
"I'm not really following what San Francisco has done to repeal the law of supply and demand."
The belief that rent control policies inflict more costs than benefits in the market for housing is notorious as one of the few conclusions of economics held across the ideological spectrum, from conservative to liberal, statist to libertarian, Keynsian to Hayekian. Paul Krugman thinks it doesn't work. Brad DeLong thinks it doesn't work. Dean Baker thinks it doesn't work. Tyler Cowen and Russ Robers think it doesn't work. Kenneth Rogoff thinks it doesn't work.
Counterexamples welcome. Can you find a prominent economist speaking out in favor of it, in any setting, in any real detail?
Here's a starting point for the other side, written by two Nobel-winners:
http://c457332.r32.cf2.rackcdn.com/pdf/books/Roofs_or_Ceilin...
Slightly later:
This paper is a great read, by the way; as close to a long-form Reddit comment as you could expect from something written in 1946 --- and about San Francisco, no less!
Friedman and Stigler take dead aim at the argument that a free market for housing somehow benefits the rich. The rich can already sidestep rent control: they simply purchase, instead of renting. Meanwhile, the perverse incentives of rent control coerce some people who would be better served by renting into buying, which then commits them to speculative investments in real estate, further exacerbating the problem.
"belief that rent control policies inflict more costs than benefits in the market for housing is notorious as one of the few conclusions of economics held across the ideological spectrum"
Define your terms. What does "inflict more costs than benefits" mean? What specific policies are we debating? Stop arguing a straw man ("rent control") by referring to the authority of "economists agree", and you'll realize that there is an easy, clear argument for the other side here: social stability.
The only thing that "economists agree" upon, is that price caps lead to shortages in efficient markets. That's it. They vehemently disagree when you start asking about policies that don't cap prices, but instead, aim to control the rate of increase in prices in order to reward long-term occupancy. Moreover, there are huge differences in circumstance that must be considered in order to have a productive debate: in a place like Houston, where land is cheap, the arguments for rent control are far weaker than in San Francisco, where Global Wealth has suddenly, spastically decided that this tiny, 47-square-mile city is where All the Monies belong, as of ~2010. (Great for Global Wealth, but bad for the people who lived here before the rich gained a new investment fetish!)
I'll make this easy for you: your argument is that "rent control" is bad because economists say it's bad, and #{STANDARD_FREE_MARKET_ARGUMENT_GOES_HERE}. Fine. Mine is that the real world is more complicated than economic theory, and that while "the free market" may be better at allocating wealth efficiently (that is, indeed, all the free market does), there's a higher value: the moral right of occupancy is worth some economic inefficiency. We should provide incentives for long-term tenancy, because such tenancy produces social stability that is better for all of us in the long run. I don't automatically value the free market because someone told me that it's good in econ 101 -- in this case, I hold another value paramount.
You began this subthread with the words "I think what you meant to say is that rent control is widely considered a failure by certain rich people...", concluding "there is more light than heat" in the debate.
I responded. No, I pointed out: rent control has been considered extensively by dispassionate economists, and, across the ideological spectrum, the conclusion has strongly tended to be that it's a bad idea.
I don't have anything more to contribute to the discussion than that; I wanted only to rebut the notion that opposition to rent control was a special pleading by the rich in favor of their own interests. The opposite is, I think, true.
You may of course yet be able to demonstrate that rent control in some form is a good idea. But you'll have to do it on the merits. I don't think the argument that opposition to rent control is a manipulative tool of the wealthy can survive the evidence.
The renting of property has always been on the uncomfortable border of rent-seeking behavior, and productive economic activity. It isn't really notable to phrase it the way that I did.
You speak of the tech bubble being an exacerbating factor, and you're not wrong, but imagine if SF managed to put all that money to good use by letting developers build new housing. Sure, it'll be full of techies, but the bubble will eventually pop, the techies will move out, and you'll have piles of now-affordable housing. Instead, all that VC money ends up getting funneled into the pockets of the landowning classes.
That does not necessarily change the city's average rent.
An ironic statement given the 3 paragraphs that preceded it...
Rent control coupled with NIMBY planning restrictions benefit connected locals who are able to secure the resulting limited spots and hinder the ability of non-residents to move in. In the short term, this freezes the existing situation - you keep your historical streets, you avoid SF turning into Hong Kong or Singapore ([2]). In the long term, (relatively asset-) poor entrepreneurial people move elsewhere (New York, Chicago, Austin... even Houston). Of course, it takes a LOT to move a global hub. We might not see it in our lifetime (how long did it take for New York to dethrone London as the global financial HQ).
The only way I'd move to SF would be if a company paid me a significantly larger amount of money, or once I retire to take advantage of the weather and food. So, do you as an SF resident see the city as a beautiful museum to be preserved, like Venice or EC2 in London, or is SF really about frontier spirit, which today looks more like Hong Kong than suburbia?
A better way to deal with bubbles is to tax them, as many nations such as Norway do with natural resources. If there is an enormous inflow of Chinese money, who are taking advantage of the great rule of law and property rights afforded by the American taxpayer to anybody willing to pay for said property, tax the property holder for the privilege. The bases at Guam and Okinawa aren't paying for themselves... how about 5% of the assessed property value a year, if you aren't a citizen or tax resident. The foreign money will STILL come because they still derive value from owning foreign property in attractive places, the probability of it being politically seized being virtually zero (I guess property taxes on foreigners are a form of seizure, though). The people who made the neighbourhood what it is benefit from the increased tax revenue (e.g. in decreased taxes or better services).
Singapore has a form of this - citizen can purchase HDB fresh builds (~80% of the market) at up to a 40% discount and without foreigners bidding for the first 4 years of the building's existence. (France also does, the ISF [3], but it applies to citizen and, due to rising property values, is chasing retired working class folks from their own homes as they do not have the liquidity to afford the tax.)
[1] http://bastiat.org/en/twisatwins.html
[2] http://scifanatic.wpengine.netdna-cdn.com/wp-content/uploads...
"“The rent ceiling is very important for Berlin because the difference between the rent paid in existing contracts and new contracts is so high,” said Reiner Wild, managing director of the Berlin Tenants’ Association. “The other problem is that we have 40,000 more inhabitants per year. Because of this situation the housing market is very strong.”"
The incentive to build new rental housing will evaporate, and people who move there will not be able to find apartments. The problem isn't that your rents are increasing too quickly, the problem is that your economy is unbalanced and you're creating housing demand faster than you can provide it. Correct response? Either increase the number of new apartments being built or slow or stop the number of companies that are allowed to locate in Berlin.
This has happened before, will happen again. So take a moment and look at the environment around Berlin for housing now, and wait 10 years. Then look again and ask yourself is housing better or worse in this city?
Or the incentive to build cheap apartments that can be profitable with the caps will increase. If you know you can easily get X amount per apartment, and can build and manage a building under that total amount, why wouldn't you? This is often a recurring theme that I see that people seem to do. Since something can't be as profitable as before, no one will ever try to make a profit now. I don't get it. There will be developers who will figure the numbers out and make good money. Of course the numbers may be too strict and my scenario isn't a possibility, but I would bet you haven't ran the numbers yet to know it's not.
What I have seen is that it takes time to get a project started. And the costs of building can go up faster than rents do, and you get to a point where it is economically infeasible to build a new building given the maximum possible rent you could charge to live there. At that point no one builds new housing because nobody likes to lose money on purpose. So all new housing stops.
There is an interesting 'bubble' here in that with nearly 0% interest rates you can get away with higher costs, but that won't last.
[1] it is going to depend on interest rates on the building loan, city taxes, maintenance, etc. Every time I've looked at building an apartment it seems to flip over to generating cash 20 to 25 years after its built, assuming single owner etc.
I couldn't figure out how much of that is actually publicly managed (versus some potential third class), but they're already a significant part of the housing landscape of Berlin - and they have less of an issue with recovering costs over 25 years than individual house owners.
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When rents are high, the Real Estate market goes up, not down. Since everybody thinks that they can recoup all building prices through rents, I've seen many of my friends buying homes at exorbitant prices and letting them for rent again to exorbitant prices.
New buildings are being built dime and dozen because rents are there to support them. People are no longer buying home to live, they're buying homes so that they can rent it out, because rent prices are high. A whole slew of new buildings are being built because they can rely on exorbitantly high rents.
Its a vicious cycle. Higher rent leads to more buildings being built. Once rents are high, it increases the costs of all goods: Hotels need to start charging more to cover rents, so do all grocery shops and everything else. Real Estate is one of the fundamental reasons behind creating the modern urban poor and homeless.
When you control rent prices, you stop buildings from being built for sake of letting out. Instead, buildings get built to really live. Like it or not, 40k inhabitants are coming in to live, rented or not. Controlling rents will allow for a sustained development. Otherwise, new buildings will shoot up as a business opportunity based on this 40k, and that will screw up everything else.
As somebody deeply affected by the ever-increasing rent prices, I believe Germany is doing the practically right thing.
The situation you describe :
New buildings are being built dime and dozen because rents are there to support them. People are no longer buying home to live, they're buying homes so that they can rent it out, because rent prices are high. A whole slew of new buildings are being built because they can rely on exorbitantly high rents.
Describes what most economists think of as inflation, not a social justice issue per se. Typically the limiter on this will be the supply of capital, and with zero percent interest rates there is very little limit. The way that works is someone borrows money X at 0.5% annual interest to buy a house which provides 3 - 5% of X annually. They borrowed at .5% and their return is 3 - 5% giving them 2.5 - 4.5% of "yield" for large sums people will do that for only 1 or 2 % yield. That is how markets allocate capital.
The housing market has limits on how fast or far it can grow. I'm very familiar with both the SF Bay Area markets which were over constrained, and the Las Vegas NV area markets which were largely unconstrained. Mortgage crisis aside, houses in the Bay area tend to increase because of contraints on new construction, and houses in Las Vegas tended to decrease because there were always new houses coming on the market so you had to "discount" the value of the house to get a buyer who would otherwise buy a new house.
In housing markets there is a tension between rent prices and mortgage prices. The cost of a mortgage results in a monthly payment X and rent costs Y. When Y > X people start buying places rather than rent them because not only is the cost lower per month, but when they transact out of the house or condo they often get some additional "equity" that has built up as a function of them paying down the mortgage and/or appreciation of the asset.
This however is unsupported : Real Estate is one of the fundamental reasons behind creating the modern urban poor and homeless.
Modern urban poor and homeless are a function of wage disparity.
Understand that a place has a relatively fixed amount [1] of housing, it also has a available various jobs near by. Those jobs pay a wage and a fraction of that wage is available to the landlords in the area as rent. It is impossible to raise the rents above the available wage fraction, people simply won't rent your space. This is why a house in Holland Michigan can only sell for $109,000 when the exact same house in San Francisco can sell for $1.5M. In Holland you are doing great if your job pays $60,000 a year, in San Francisco there are jobs that pay $200,000 a year.
So you take the amount of money being paid out to workers, and take the fraction of that people are willing to spend on housing. And you get the total available rent/mortgage dollars in a region[2]. That pool is fixed, but it isn't evenly distributed. So tech workers will bring home big pay checks and wait staff much smaller pay checks. And when the number of available spots runs out (priced out by the market dynamics like "close to work" or "good view") they are gone, and pressure is applied to create new spaces or try to capture more of that value by raising rents.
> As somebody deeply affected by the ever-increasing
> rent prices, I believe Germany is doing the
> practically right thing.
[1] It changes due to new building and old buildings being destroyed but much less quickly than the job opportunities change.
[2] We'll leave out places like New York or London where billionaires buy apartments but don't live there.
Yes, because you need a minimum X% upfront payment and all kinds of eligibility to purchase a house. For renters and people who can't afford that upfront cost (you can't take a loan to take another loan), they are left in a perpetual rental cycle. The others who are able to break out of that cycle once, go on to build more and more houses. So one group of people dream of living in their own house, whereas others build many and rent it out for half the rent. If you've seen the latest infographic about how being born rich gives you a golden spoon, and becoming rich is not about "working hard", you'll understand how these rental policies screw up people here.
And people also factor in the "rise of rental prices", so as long as you have money, you can buy a home loan now and bank on rental prices increasing soon. In around 4-5 years the rents would have increased enough to cover the mortgage, and then its time to start shopping for a new building.
Property becomes gold here partly because of the increasing rent prices. Even if you lose some money in mortage in the short term, anyways you also own the property which is increasing in value. So even people leaving a city will still retain their home and let it out for rent, rather than selling it back into the system. Buy buy buy, never sell unless you're in a financial emergency.
Home Loans are also different here. We have fixed rates (9.75-11%) and longer tenures.
>> Modern urban poor and homeless are a function of wage disparity.
No, its a function of wage rise. Doesn't matter how much you get paid, but as long as your salary rises the same as rental price rise, you can retain your home. If not, you lose your home, as simple as that. You can't leave the city because there are not much jobs anywhere else. So you have to stay, but if you can't retain your home it will take you on a trip closer and closer to the slums until you realize one day that you're in it.
Food is mostly government subsidized, so people can even manage the food. But housing is making a killing here. So when it comes to inflation, housing plays the biggest part and not food or transport. I can't give you fancy numbers though.
There was an interesting article in Bloomberg about Mumbai in 2012 (http://www.bloomberg.com/bw/articles/2012-07-05/mumbais-boom...) with the rent control there causing huge market imbalances as India lifts millions of people out of poverty into the middle classes. It reads similarly to situations in Shanghai and Chengdu as a people's wages have risen faster than the housing market could keep up.
The reason I ask about how long it has gone on is that the situation you describe always ends up correcting at some point, (here in the US we called it the housing bubble), and when it does all the people who were betting on the ever increasing rents find themselves going bankrupt because rents cannot increase any further, and that puts them into a financial emergency where they sell, which depresses prices of houses, which results in other speculators also falling out of the market, and you get a really huge recession with lots of people going broke and a bunch of supporting industries (construction, remodelling, furniture, etc) being carried along as well.
I don't know exactly how Germany is planning to implement these laws. But at least I feel a sustained rate of growth should make life better for everybody in the city, rather than plain rent caps or slabs.
When your loan holders get desperate because the loan is due and no one is willing to pay their extortionate rent, they will either go broke (lender reclaims the property and sells it at a loss) or reduce rents dramatically to insure 100% occupancy (lowering prices to capture more of the demand). Sometimes both, rents will go down and the people owning the buildings will go bankrupt.
If you're willing too, let me know what city this is happening in, I'd like to put it into my crawler to flag articles about rents to watch how this plays out over time.
On the flip side were these people move from leaves voids and some area's of the EU have become over-crowded and other parts are becoming ghost towns.
Still not everybody can look out the same port window, yet the EU free movement allows it and takes not into account the impacts and disparity of the members countries in the free movement aspect.
WIth that the German solution is not a solution, it will just create a privileged group who have a rent controlled place over those who can not get one at all.
10 years down the line for Berlin, it will be worse as they will shuift the price discrimination into one of space and with that, 10 people to a room hotspots and illegal housing will only grow.
When you have a supply and demand problem, the outcome is simple, but if you handicap that you just create a backlog of problem that piles up and in this case shifts from cost to supply or lack of and does nothing to address that from any angle.
Yes, this is going to be a problem, but will be seen as good by the people in the short term with shortsighted vision.
I know that has been the case in London and whilst no rent controls we have all construction over a certain numebr of houses/flats (mostly flats) must be social housing/cheap. So it gets down to sneaky ways to play the figures.
But more people means more demand and when the ethnic demographic is declining in those places and yet the population is increasing then yes it is a very large factor.
Now the real issue and again very much tied into this would be companies love cheap labour so any way to increase access will be pushed with the political clout companies sadly have. This means wages get lower and that is the real issue. How so, well if wages do not increase and demand for housing does then you get situations in which we get rent controls being introduced and whilst they seem good. They are address an effect and not the problem and that is the wages being kept low artificialy and that is done via increased access to labour that will price fight each other.
So one extra demand upon housing driving up prices is also a extra choice for jobs and driving down wages and with that we get hot-spot area's that need such intervention, sadly not the root cause, though that is not a simple fix.
Could also say the demise of the unions also played a large part in enabling a work environment and culture that allows exploitation of workers, wage wise. not everybody works at google or the like and with that many middle to low skilled jobs been driven down and semi-skilled jobs in which they would train people, why bother, just use high skilled people on low skilled wages, plenty to pick from.
> but in SF the main limiting factor is politics.
so everyone endsup with crap accommodation.
For example some landlords would put in good kitchens, flooring, insulation etc and charge a premium for renting a better home. There be no incentive to do so in this case.
I'm from Ireland, which has no rent controls, but recently had a property bubble which bankrupted the country. "Build more houses/apartments" isn't always a good idea.
I suppose they've filled up all the cheap areas of former East Berlin now...
So, what the authorities did here in effect is just pushing more people to the gray/black market and shady business transactions to get things done.
I would happily pay double the rent for a similar sized apartment but one with lots of nice touches, such as luxury appliances and such. I've often thought that if I ever rent out a property, I'd fill it with nice things and then charge more - high end coffee machines, in-wall speaker systems, nice furniture, etc. Perhaps there's a reason that landlords don't do that, though.
My buddy is working on increasing this transparency though. They're in the Seattle area and looking to provide home buyers market rates for a given feature. e.g. this house should be $X cheaper because the windows are Brand Y
This is all just anecdotal, of course, and just something I've noticed locally - perhaps other places are much better. After my partner started working, we started looking at places roughly double the rent of our previous place, but in the same area - and we found that these places were pretty much the exact same, just a lot bigger.
Oh, and the law doesn't apply to the (rare) furnished flats at all.
In Berlin, there is interesting issue now. A friend lives in a apartment for 12 years, pays only 250 €. He says rent was increased by only € 1 during those years. If he moves to some new place, he will have to pay between 900 - 1000 € for same type of apartment cause rents are raising fast.
So either they should allow to increase rent to existing tenant or control how much landlord can raise for new tenant.
Otherwise, I will be paying 900 € whereas my neighbour next door will only be 250 € for same apartment cause she is living there for years.
Or did I miss something?
I rented apartment last year and they increased rent by more than 40%.
This new rule states that you cannot set the rent above 10% of the local market average for any tenant.
So for existing tenants, most likely the first rule applies (because new tenants rise the average), for new tenants the second applies.
He says one has to "set a maximum price below what prevails in the market" to create shortages. Guess what? This law doesn't do that. You are always allowed to charge up to 10% more than the average price.
I don't see a downside, other than in hot markets like Vancouver where the capital appreciation of properties is sufficiently high to not require renting them out in order to turn a profit.
http://www.inspiration-asia.com/wp-content/uploads/2013/08/B...
Berlin sits right in the middle of a swamp (one explanation for its name is that it's derived from a slavic word for swamp), so there are limitations to how high you can build without things falling over. If at all possible, the manhattan approach of going vertical is at least crazy expensive.
There were 8744 new units built in 2014 (state statistics office). There are (according to the article) 40k new residents per year - assuming that on average 2 people share a unit, that's an annual requirement for 20k new units.
My guess is that Berlin simply doesn't scale.
1. http://www.bloomberg.com/news/articles/2015-03-27/why-the-mo...
http://www.nytimes.com/2014/12/15/technology/stockholms-hous...