As a reaction to an extremely tight housing market, the government of the German capital of Berlin has introduced price controls on rents which took effect on June 18, 2019.
For the next five years, rents cannot be increased. This interventionist measure, made by a coalition of center-left to left-wing parties, is yet another attempt in a series of failed attempts to interfere with the market. The current housing situation is the result of local, federal, and European interventionist policies.
The Impact of Expansive Monetary Policies
In March 2019, the steadily decreasing interest rates on German government bonds fell below zero, directly decreasing the interest rates on fixed-term deposits and consequently affecting private savers. This development is said to come “on the back of ‘dovish’ central banks.” The low yield on bonds has made other sectors more attractive: real estate prices have skyrocketed, while they are “affordable” due to the low interest on credits and mortgages. The news media in Germany has quoted interest rates of less than 1 percent on construction credits over ten years. At the same time, increasing production costs, caused for example by a 4 percent increase of the minimum wage, combined with high competition, are putting pressure on the construction sector. The already low profit margins have stagnated since 2015, at the same time facingincreased inflation in the Euro zone. Representatives of the construction sector (e.g., the Zentralverband Deutsches Bauwesen, ZDB) foresee that they will not be able to offer enough supply for the increased demand, still fueled by the migration of young people from the formerly socialist East Germany.
Planning without Calculation
The coalition partners of the government of Berlin are themselves not clear about the demand. Officials are favoring government planning over private enterprise, apparently ignoring the market realities. It is due to their ineffective bureaucratic decisions, for example, that the transfer of city-owned land to politically favored city-owned development companies has taken more than a year. At the same time, under the city’s development “plan,” all builders are required to accept additional costs for the development of social infrastructure like day-care centers, and for the creation of green areas. In fact, the environmental regulations supported by the green party have made project realization less profitable and slows down potential development. When the leftwing senator for Construction proposed to loosen regulations on the felling of trees in potential building sites, the green party blocked the measure. Their guiding principle is, as stated in their press release, “who builds in Berlin has to compensate Berlin.”2 In other words, if you want to invest in the hope of making profit, do not come to our city.
The failure of these policies is strikingly clear: The number of households in Berlin has increased by 2 percentfrom 2016 to 2017, while the number of existing housing has increased by only 0.8 percent. Newly issued building permits cannot keep up with the need for new development either. The average rent is estimated to have doubled within the last ten years.
The Call for More Intervention
The policies implemented by this “progressive” government are based on an increasingly popular mentality of dependence on the state. Citizens of Berlin have started an initiative to expropriate larger private real estate companies and collectivize the apartments. Politicians have received wide media coverage when supporting these efforts. The head of the same green party which hinders construction on the grounds of environmental concerns does not mind when the deeply indebted city, which is also governed by his party, expropriates existing units. No calculator is needed to see that this cannot create new housing. In fact, it is certain to prevent future investment. Under public pressure and in line with their own ideologies, the “red-red-green” government has decided to stick to their interventionist policies and implemented price controls.
Which Way Forward?
No book title could describe this situation better than Mises’s Planned Chaos. The green party has already made their contempt of the profit motive clear when demanding compensation for constructing houses. “In the eyes of the interventionists, the mere existence of profit is objectionable.” (Planned Chaos, p.12.) Interventionist policies, which Mises predicted to be doomed to fail, have also failed in this case. The city’s government, unwilling to abandon the failed policies, has resorted to the next step and implemented price controls.
The next elections will be held in fall 2021. The price controls will reduce investment and thus the capital-per-head ratio cannot keep up with the development. Above that, there is no way for cities in the East like Dresden — close to Berlin with a good university and lower unemployment rate — to provide an incentive for people to move there instead of to an expensive but hip city. Worsening of the housing situation is likely to come, yet the mentality of the governing parties is clear, as is that of their voters. One can expect more interventionist policies through 2021. Little has been learned decades after the government-controlled economies in Germany devastated the country in the twentieth century.
One small sign of hope, however, could be the replacement of the head of the European Central Bank (ECB). It currently seems that the new president of the European Commission will not be German conservative Manfred Weber. Instead, a German conservative could now become the head of the ECB. President of the GermanBundesbank, Jens Weidmann, is supposedly a candidate for this post. Despite his recent backing of the previous ECB policies, he does have the reputation of being hawkish, and his reluctant acceptance could be a political move to become acceptable to the southern European countries against the resistance of the French president.The ECB could use a hawk.
[ZH: Forget that 'sign of hope' as it is becoming clear that IMF Director and uber-dive Christine Lagarde will take over from Draghi and more of the same.]