Are rent caps antisocial?

The idea is good, but the implementation does more harm than good. Rent caps have been around for a long time. And their harmful effect has been known for a long time. And that despite the fact that they really are well-intentioned. And absolutely necessary to avert a looming further split in our society. We have to help low and middle incomes to get out of the “housing” cost trap!

There are many approaches, including in the extreme case the “socialisation of property”, which has recently moved closer in Berlin through a referendum that is not binding for the Senate, to put the state back more strongly into a doer role. Or less extreme, but basically just as much an intervention in property rights, the various rent caps that countries and states in Europe are currently trying.

So where exactly is the cause of the scarcity of housing, primarily in urban centres? Right, more people need an apartment than there is housing available. But what are the drivers?

On closer inspection, the first trend has started to change again since Corona. People are increasingly moving back to the commuter belt, and land prices there have risen sharply. However, this mainly applies to families with rather higher incomes. Demographic change and weekly commuting create other problems, because different apartment types and forms are sought here. Micro-apartments. Barrier-free living. Living with concierge. Living with workspaces are keywords that come up frequently.

At the same time, building regulations have been massively tightened over the last ten years and more. Rampant fire safety rules, energy-efficient building, etc. simply make building more expensive.

If we now add the explosively rising material costs in construction, we have long since arrived at massive inflation that the statistical basket of goods does not reflect. Opium for the people. Look at rent developments over the last ten years. And look at the development of disposable incomes. Then in many cases we are already clearly beyond the point where rent caps could still have sufficient effect. Rather, we’re at the point where a new lease has simply become impossible for a larger part of the population!

Long since over for the middle class in metropolitan areas! We used to have programmes in which privately financed investors built publicly subsidised housing and received low-interest loans in exchange for a long rent price binding of the subsidised apartments. That worked well as long as the general interest-rate level was higher. But since all the world’s central banks have brazenly been printing money and buying up junk paper, capital in search of a safe haven has—surprise—discovered concrete money for itself.

This drove up the factors for apartment buildings—by which professionals mean the multiplier between a building’s annual net cold rent and its purchase price—from previously 7–10 to 25–50. Returns, i.e. profit on the capital employed, fell accordingly from around 8% to around 3%. Sure, better than negative interest on the bulging bank account. But basically—after administration and maintenance costs for landlords who calculate conservatively—no longer a business.

Across Europe there are a few rent-cap mechanisms that I’ve looked at. And with all of them, it’s very easy to explain why they not only must fail, but achieve the opposite of their well-intentioned objective.

Perhaps the craziest idea came—who would have thought it—from Berlin. In the first approach, they tried to tie rent caps to the condition that rent would not exceed a certain share of the tenant’s income. Nicely meant. But what would that logically have led to? Landlords would only have accepted tenants with higher incomes for their apartments. And that really would be the most antisocial effect rent caps could have.

Probably the fairest idea in theory that can exist at all. Unfortunately very time-consuming in terms of data collection and implementation. Many countries, many cities still do not have a rent index to this day.

And because the devil is in the detail and the statistically ascertainable surcharges for higher-quality fittings are only very small, this form also leads to the fact that the still scarce housing is neither expanded nor renovated. Because demand is there anyway. And the price is capped. In fact, the only ones who benefit, basically, are tenants of luxury apartments. And that really is an antisocial consequence of a socially intended regulation.

Basically not new at all. Because in all rental legislations in Europe that I know, rent increases have for years already only been allowed to be minor. Or can only be justified by more extensive renovations, depending on the country. In fact, the stock of existing contracts would be “protected” here.

But that helps neither the person moving in, nor someone who, for example for reasons of age, wants to downsize—and then finds that the 1-room apartment on a new lease costs more than the 4-room apartment under their old contract.

So basically rent caps are a good idea? Yes and no. It doesn’t create housing… But at least it does less harm than the other measures. It probably prevents real measures because “we’ve done something…” and the pressure is at least eased.

The discussions alone about expropriations and rent caps have ensured that investment projects were reconsidered once again. Or that instead of a normal apartment building, a boarding house was built instead, which is not covered by rent caps. Or that landlords only accepted commercial tenants. Or that in the end luxury apartments were built and sold—rather than creating real housing. So: no matter which rent cap was implemented, no matter where. The creation of affordable housing was always further reduced.

So: the social explosive is there. And it’s not getting better. It cannot be that millions of households in Germany have to invest too large a part of their income in rent. And it cannot be that a purchase is no longer an option for exactly these households. And this is exactly where “antisocial” comes into play again: Through increasing the share of the state. Through the devaluation of saving and through the promotion of inflation by state institutions, the promise of upward mobility that was the motivation and driving force for the German Michel was broken. And the part of the population that was able to build wealth became significantly smaller. As a result of state intervention.

Build: Based on needs. Economically. With incentives. For everyone.

We need to relieve low incomes. It is always argued here that the tax burden for low earners is low. That’s theoretically true. Only it’s pretended that the costs of the social security systems, which were legally capped jointly for employers and employees at 40%, are not taxes. How antisocial is that? We force precisely low and middle earners into a system that increases their labour costs by 40% and then claim it would be social if the progression in the tax rate starts a few thousand euros further up? The actual tax burden is higher by exactly these 40 percentage points! And higher earners like self-employed entrepreneurs or executives—and equally all civil servants—are exempt or can have themselves exempted.

Absurd! This burden has to be spread more broadly. In my opinion we need a citizens’ insurance. And I am sure that every higher earner would have to agree here out of a sense of fairness and logic alone. And we also don’t need 40 different health insurance funds that are quasi nationalised anyway. One is enough. One that manages better. Doesn’t waste money on marketing. And has a uniform administration.

And with the breathing room gained for low and middle incomes, wealth creation must be made possible for exactly this social class that made Germany strong and, hopefully, will make it strong again. Precisely the private provision that in the end is also in everyone’s interest because it prevents pensions from being too small, 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 distribute the product “letting” across more shoulders again, then building will be worthwhile again. And if support flows broadly into society and a broad front participates in wealth creation, then wealth creation will once again be socially acceptable and the promise of social advancement that shaped our country’s success in the post-war period will become credible again.

I just wanted to get that off my chest. I don’t expect everyone to share my opinion. But I would be very happy about constructive criticism and perhaps better ideas on how the existing problem can be solved. Why am I getting worked up? On the one hand, I’m a landlord. And of course rent caps have possible economic impacts for me. And I rent out both in the luxury segment and in the completely “normal” segment and see how this is drifting further and further apart. And I believe that we as a society have to tackle and solve this question. But not in a populist way that ultimately destroys more than it brings benefit.

Arnd

started a small link collection on the topic that I found during my research: (last update: 12.10.2021)

Wikipedia (Source: wikipedia.org, as of 12.10.2021):

In 2016, 14 of the 36 OECD countries had some form of rent control in force,[1]

including four states in the United States.[2]

Rent control is, alongside social housing, or housing benefit payments, one of several proposed measures for the creation of 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]”

The rent cap is harmful (Source: H.A.Z., as of: 20.08.2019) [unfortunately partly behind a paywall]

here are two older articles:

Flawed design: rent cap — 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)