Are Rent Controls Anti-Social?
By Arnd
The Idea Is Good
Rent controls are a well-intentioned idea. And in my view, it is also necessary that we avert the looming division of our society. And especially help low and middle incomes escape the cost trap of "housing".
And one could — also for good reasons — hold the conviction that "housing," just like "transportation," is a necessity for which the state as a community must at least have a regulatory function. If necessary, it would even have to create the infrastructure when the market fails to deliver. Or simply fails.
The Devil Is in the Details
There are many approaches, including in extreme cases the "socialization of property," which recently came closer to reality in Berlin through a non-binding referendum, to bring the state back into a more active role. Or less extreme, but fundamentally just as much an intervention in property rights, the various rent controls that countries and states across Europe are currently attempting.
Where exactly does the cause of the housing shortage lie, primarily in urban agglomerations? That's right — more people need an apartment than housing is available. And why is that?
- Migration from rural regions and population movements
- Demographic developments (more single households, more micro-households)
- Weekly commuters need housing to be at least partially present at their workplace during the week
- In popular locations, the luxury market absorbs housing that is only rarely used
Looking more closely, the first trend has begun to reverse since Covid. People are increasingly moving to the suburbs again, and land prices there have surged. However, this mainly applies to families with higher incomes. Demographic development and weekly commuting bring other problems — different types and forms of housing are sought here. Micro-apartments. Barrier-free living. Living with concierge services. Living with workspaces are keywords that come up frequently.
At the same time, building regulations have been massively tightened over the past ten or more years. Sprawling fire safety rules, energy-efficient construction, etc. simply make building more expensive.
And Then There Was Inflation
If we now add the explosively risen material costs in construction, we have long arrived at massive inflation that only the statistical basket of goods fails to reflect. Opium for the people.
The dream of home ownership? For the middle class in urban areas, that dream is long over!
We used to have programs where socially subsidized housing was built by private investors who received low-interest loans in exchange for long-term rent controls on the subsidized apartments. That worked well as long as the general interest rate level was higher. But since all the central banks in the world have been shamelessly printing money and buying up junk bonds, capital — surprise, surprise — has discovered concrete as a safe haven.
As a result, the multipliers for apartment buildings — what experts call the factor between a building's annual cold rent and its purchase price — rose from 7-10 to 25-50. Yields, i.e. the profit on invested capital, correspondingly dropped from around 8% to around 3%. Sure, better than penalty interest on a bulging bank account. But fundamentally — after management and maintenance costs for any serious landlord — no longer a viable business.
Which Rent Control Concepts Work?
Across Europe, there are a few rent control mechanisms that I've examined. And for all of them, it's very easy to explain why they must not only fail — but achieve the opposite of their well-intentioned objectives.
Income-Based Rent Prices
Perhaps the craziest idea came — naturally — from Berlin. The initial approach tried to tie rent controls to ensuring that a certain proportion of the tenant's income would not be exceeded by the rent. Nice thought. But where would this logically have led? To landlords only accepting tenants with higher incomes for their apartments. And that would truly be the most anti-social effect a rent control could have.
Rents Fixed to a Rent Index
Probably the fairest idea in theory that could possibly exist. Unfortunately, very costly in data collection and implementation. Many countries, many cities still don't have a rent index to this day. And since the devil is in the details and the statistically determinable surcharges for higher-quality fittings are only very small, this form also leads to the already scarce housing being neither expanded nor renovated. Because there's enough demand. And the price is capped. The only beneficiaries are tenants of luxury apartments, whose rents suddenly become cheaper. And that is truly an anti-social consequence of a socially intended regulation.
Rent Increases Are Temporarily "Suspended"
Fundamentally nothing new. Because rent increases in all European tenancy laws I know of have been limited to only small increments for years. Or justified by more extensive renovations, depending on the country. In effect, existing old contracts would be "protected" here. Which helps neither those moving in, nor those who, for example, want to downsize for age-related reasons — only to discover that the 1-bedroom apartment on a new lease costs more than the 4-bedroom apartment under their old contract. But fundamentally a good idea? Sort of. It doesn't create housing… But at least it does less damage than the other measures.
What Does Capital Do?
As the saying goes: water finds its way. So does capital.
Imagine our politicians as a group of amateur hunters racing through the forest with clubs, trying to catch a rabbit.
The mere discussions about expropriations and rent controls have caused investment projects to be reconsidered. Or that instead of a normal apartment building, a boarding house was built — which isn't covered by rent controls. Or that landlords only accepted commercial tenants. Or that luxury apartments were ultimately built and sold. Instead of creating real housing. So: no matter which rent control was implemented where — the creation of affordable housing was always further reduced.
So: the social dynamite is there. And it's not getting better. It's unacceptable that millions of households in Germany have to invest too large a share of their income in rent. But it's also unacceptable that buying is no longer an option for exactly these households. And it's also unacceptable that saving is punished and poor management is rewarded.
So What to Do?
The simple answer is: Build. Needs-based. Economically. With incentives. For everyone.
We need to relieve low incomes. The argument is always that the tax burden for low earners is low. That's theoretically true. But it pretends that the costs of social systems, which are legally capped at 40% for employers and employees combined, aren't taxes. How anti-social is that? We force precisely the low and middle earners into a system that increases their labor costs by 40% and then claim it's social when the progression in the tax rate starts a few thousand euros higher? Meanwhile, the actual tax burden is exactly 40 percentage points higher! And the higher earners — self-employed entrepreneurs, executives, and likewise all civil servants — are exempt or can opt out.
Absurd! This burden must be distributed more broadly. In my opinion, we need a citizens' insurance. And I'm sure that every higher earner would have to agree out of a sense of justice and logic alone. And we also don't need 40 different health insurance companies that are virtually nationalized anyway. One is enough. One that manages better. Doesn't waste money on marketing. And has a unified administration.
And with the breathing room gained for low and middle incomes, wealth building for precisely this social class — which made Germany strong and hopefully will again — must be made possible. Exactly the private provision that ultimately also prevents inadequately small pensions in everyone's interest must be promoted. And why shouldn't real estate funds or cooperatives be just as eligible for support as a life insurance policy? If we can spread the "renting" product across more shoulders again, building will be worthwhile once more. And if subsidies flow broadly into society and a broad base participates in wealth building, then this wealth building will also become socially acceptable again.
I have started a small collection of links on the topic that I found during my research: (last updated: 12.10.2021)
Wikipedia (Source: wikipedia.org, as of 12.10.2021):
“Rent control (also rent freeze or rent cap) is a mostly state-imposed fixing of rental prices through legally standardized maximum prices or a prohibition or restriction of rent increases within residential lease agreements.
In 2016, 14 of 36 OECD countries had some form of rent control in effect,[1]
including four states in the United States.[2]
Rent control, alongside social housing or housing allowance payments, is one of several proposed measures for creating affordable housing.
There is a scientific consensus among economists that rent controls reduce the quality and quantity of rental housing units.[3][4][5][6][7][8][9]”
Rent control causes harm (Source: H.A.Z., as of: 20.08.2019) [partly behind paywall]
two older articles:
Flawed rent control — concept only works for luxury apartments (Source: rbb online, as of: 21.11.2013)
The price spiral in the housing market remains unchecked (Source: WirtschaftsWoche online, as of: 22.09.2015)