To deal with gentrification and speculation the people of Berlin passed a rent control law that doesn’t allow landlords to rents higher than a geographically-constrained average. The threshold is set on a per-square-meter rate in each city district, and is derived based on a biennial state census of rents (the district average, I think… But I am having trouble finding formulas in English). New rent contracts can only be 10% more than this average rent–anything more than that is illegal until a new Census shows the average has risen. Then the max is 10% higher than the new average. Basically then, landlords’ ability to raise rents is tied to the decisions of other landlords—if everyone raises rents by the maximum amount then the maximum amount set by the next census will be that much higher.
This changes the game, dramatically. In this post I want to walk through some theoretical implications. This is a theoretical exercise. I don’t necessarily see all of these implications unfolding, but they are worth thinking about to truly grasp the implications of this sea-change policy. Here are some of the stranger possible implications:
- Collective Action on the Part of Landlords?
If I’m a landlord in the beautiful and charming Litchterfelde West, then my ability to raise rents is based on what everyone else in that neighborhood’s administrative district decides to do. Hypothetically, if every landlord in the area who can afford to in fact raises rents up to that 10% threshold, then next year I can raise my rents more than if every able landlord in the area ends up raising rents by 5% or 3% of that average. Could this lead to a situation where landlord associations actively push members to work collectively to push rents upwards? If my neighbor might get picked for the Census, then I want him to have high rents so that this average and the limit it creates is higher. This enables me to raise rents higher in the future.
Obviously not everyone could participate in that type of strategy. If my unit is in disrepair I can’t help other landlords out by raising rents unless demand is so pent up people will accept a sub-par unit at higher costs. Do other landlords thus want to ensure I am more likely to “keep up” unit quality then?
- New Development Can Now Directly Impact Existing Rents
If new developments add a combined 5,000 new, upscale units to my area—that could push a district of even 50,000 households’ median a good deal higher in the next census than if the new developments weren’t coming in. That means the mere addition of these units to the area increases what I can charge next time around.
Two implications in this:
A: Landlords might have a new incentive to support expensive new development coming into areas where they own property. Might they thus want to oppose developments for the poor coming in–and thus pulling the average down?
B: the geographic scale at which local rates are set mitigates/exacerbates the impact of new developments on this policy. If districts have 300,000 households—and only adds a few thousand new units every year—then this impact might be marginal. But if my district has only 70,000 households, then a few thousand matters.
- Un-Even Capital Investment?
Now wealthy districts can continue to raise rents faster than non-wealthy ones. Would induce investors to only finance new developments in already wealthy areas where the rents (eg returns) can rise faster? Rather, could this produce arbitrarily un-even investment patterns? If your neighborhood’s primary concern is gentrification then this could be a good thing. A gentrifying neighborhood in a district that is mostly poor could see this put a break on investment in further gentrification. The other poor neighborhoods of the district “pull” the average max rental change downward, lowering profitability of new development in said gentrifying neighborhood. In contrast, if you are in a gentrifying neighborhood in a district that is much more expensive than your neighborhood, then the gentrification is still readily facilitated by rich areas pulling the average upwards. So… Could this contribute to income segregation by district? (again—just thinking out loud here—not offering super robust hypothesis).
- Edge Effects
Suppose I live at the poorer edge of a district which is otherwise quite wealthy. This enables landlords on my (poorer) end to raise rents faster than landlords across the street from me in a district that is poorer overall. If there’s something on my street that attracts residents: a park, a rail stop, a large transit center…. Then there’s going to be a lot more competition for units on the other side of my street. This is because over time my side of the street is rising in rents faster than the side in the poorer district.
What we could see, then, are a lot of arbitrary breaks in the rent surface or rent gradient across the city—with these breaks taking place at the edges of districts.
- The Politicization of the Data and Data Gathering Process
Bloomberg basically suggests this is already happening. People are very upset about the methodology. If Bloomberg is right and a sample of 20,000 households decides these rules for the entire city–then all of the sudden what my tenants report as their rents has very immediate, real impacts on my ability as a landlord to profit in the near future!
These are opening thought. I hope serious research gets conducted on this topic so we can evaluate if this is the type of solution that we need.