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28.02.2020

General

Berlin’s rent cap faces legal challenge

“Red-red-green has committed a historical blunder,” said Kai Wegner, regional chairman of the Berlin CDU, in a statement in response to the city’s new rent cap law on the party’s website. Many lawyers have described the new legislation as constitutionally questionable and the Christian Democrats, together with the FDP, intend to file a complaint with the Constitutional Court by summer 2020. One argument is that the law contains provisions which fall within the competence of the federal government. In addition, it is claimed that the rent cap violates protected property rights protection under the Berlin constitution. For private landlords who have based their business models and retirement planning on the income generated by their apartments, the rent cap could, in the worst case, mean financial ruin, as they would no longer be able to rent out their apartments profitably. The only alternative would be to sell, which would further reduce the supply of rental apartments. Correspondingly, critics argue, the cap does nothing to remedy the cause of the housing shortage: the lack of new construction. After all, according to official estimates, there is already a shortage of around 135,000 apartments.

According to the CDU, FDP and experts from the Chamber of Commerce and the housing industry, the rent cap does not solve the housing shortage. On the contrary: it deters investors and developers and unsettles the market. After all, there is no guarantee that the rent cap will only be limited to five years. It is also not clear whether newly built apartments will be subject to restrictions in the future. At the moment, new housing built after 2014, rent-controlled social housing, owner-occupied housing and specialized housing are excluded from the cap. According to the law, the rents for around 1.5 million apartments will initially be capped in the capital. “Investors are already fleeing the city. If there is no new construction, the pressure on rents will continue to rise,” Wegner argues.

And the rent cap could have quite serious side effects. Experts assume that many landlords will turn their backs on the rental market and sell their apartments, thereby losing a steady stream of retirement income. This is because the calculations they based their retirement planning on no longer work due to the forced reduction of rents. It is even worse for landlords who have recently invested large sums of money in their properties and are now only allowed to increase the rent by one euro per square meter. In all likelihood, a growing number of vacant apartments will be withdrawn from the rental market and sold as condominiums. Other private investors will simply move into their apartments themselves or give them to relatives or acquaintances. Thus, the rent cap creates a lose-lose situation, not only for landlords but also for apartment seekers in Berlin.

The skilled trades will also suffer under the new law because owners will invest less in the modernization and renovation of their properties. The results: a lack of orders leading to financial losses, which small businesses in particular will quickly feel. Consequently, the rent cap will also contribute to the decline of the housing stock. The first consequences are already being felt: many landlords, including Berliner Volksbank, are putting renovations on hold. According to a sector survey, 90 percent of companies in the housing industry are considering cutting back on spending on refurbishments. At the same time, as tradesmen grapple with declining orders and, in the worst case, have to lay off employees, tax revenues will also suffer.

At first glance, the rent cap seems to offer a perfect solution for low- and middle-income households. But after a closer analysis of the long-term consequences, it is clear that there seem to be only losers under the new law. Hopes are correspondingly high that the constitutional courts will soon reach a verdict.

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