Berlin’s failed rent freeze offers a warning to Sadiq Khan

Berlin’s rent freeze, hailed by some as a potential model for London, is already coming to an end after less than two years. In its final ruling this week, Germany’s Federal Constitutional Court struck down the rent freeze as unconstitutional. In this sorry saga, there are plenty of lessons for those who supported rent freezes in our capital – not least London's mayor Sadiq Khan.

The rent freeze was passed in June 2019, and took effect in February 2020. It froze nearly all rents across the city at their 2019-level, supposedly for a period of five years. It was hugely popular in Berlin, and attracted a lot of attention beyond. Rent controls were official Labour party and Green party policy in the 2019 General Election, and some specifically referenced the Berlin example. Sadiq Khan, for example, said last year:

'We can learn from international precedents, such as those set by Paris, Berlin and New York, to design an effective system of rent control for London. […] Londoners back my proposals, with 68 per cent supporting the introduction of rent controls.'

So with Berlin’s experiment on the way out, what are the lessons for the UK?

The ruling of the Federal Constitutional Court is, of course, not particularly relevant to Britain. The court’s verdict says more about the intricacies of German federalism than it does about rent controls; and in any case – 'unconstitutional' does not mean 'bad'.

What is more interesting than the court’s verdict, though, is the economic verdict. Why? Because there is no reason to believe the economic effect of a rent freeze would be any different in London, or any other UK city.

A study by the Munich-based Ifo Institute for Economic Research has shown that since the passing of the rent freeze, the number of rental properties coming on the market in Berlin has fallen by almost half.

That, on its own, does not have to mean much. It could simply be a consequence of the pandemic, or of any number of other factors. So the Ifo study also looks at two control groups. Firstly, newly-built properties completed in or after 2014 are exempt from the rent cap. This means there is a small subset of Berlin’s housing sector in which the market economy survives, like a little West Berlin within a large East Berlin. This is their first control group. Secondly, the study also compares Berlin to a weighted average of 13 other large German cities.

In the years preceding the rent freeze, supply trends were similar in all three of those sectors. From then on, however, the differences are stark. The steep drop in supply happens only in Berlin’s rent-controlled sector. It does not happen in comparable German cities (where we actually see an increase in supply), and it does not happen in Berlin’s residual unregulated sector (where we see an even bigger increase) either. This suggests the rent freeze has led to a sharp decline in the supply of rental properties.

This is (or rather, should be) entirely unremarkable: it is simply what any economics 101 textbook would tell us. The only thing remarkable is that the effect became visible so quickly.

A UK version of a rent freeze would, if anything, be even worse. The constitutionality of Berlin’s rent freeze was disputed right from the start. It was not a foregone conclusion that the Federal Constitutional Court would reach this verdict, but it did not come as a complete surprise either. If landlords have good reason to expect that rent controls may soon be overturned again, most of them will not hugely change their behaviour just yet. If they knew right from the start that rent controls were to stay, their impact would be vastly greater.

Berlin had at least that constitutional ambiguity going for it. If it happened here, London would have no such cushion. Let's hope Khan and the other supporters of rent freezes take notice.