"“The rent ceiling is very important for Berlin because the difference between the rent paid in existing contracts and new contracts is so high,” said Reiner Wild, managing director of the Berlin Tenants’ Association. “The other problem is that we have 40,000 more inhabitants per year. Because of this situation the housing market is very strong.”"
The incentive to build new rental housing will evaporate, and people who move there will not be able to find apartments. The problem isn't that your rents are increasing too quickly, the problem is that your economy is unbalanced and you're creating housing demand faster than you can provide it. Correct response? Either increase the number of new apartments being built or slow or stop the number of companies that are allowed to locate in Berlin.
This has happened before, will happen again. So take a moment and look at the environment around Berlin for housing now, and wait 10 years. Then look again and ask yourself is housing better or worse in this city?
>The incentive to build new rental housing will evaporate
Or the incentive to build cheap apartments that can be profitable with the caps will increase. If you know you can easily get X amount per apartment, and can build and manage a building under that total amount, why wouldn't you? This is often a recurring theme that I see that people seem to do. Since something can't be as profitable as before, no one will ever try to make a profit now. I don't get it. There will be developers who will figure the numbers out and make good money. Of course the numbers may be too strict and my scenario isn't a possibility, but I would bet you haven't ran the numbers yet to know it's not.
Generally, but I don't know about Berlin specifically, the cost of building new apartments has gone up over time. There is also the sunk cost of building them. So if you imagine the whole transaction from start to present, you get a big investment (say $10M) and you build a building with 100 units which you rent out at $1000/month. After say 22 years[1] your apartment building has recovered its costs and actually returning free cash flow.
What I have seen is that it takes time to get a project started. And the costs of building can go up faster than rents do, and you get to a point where it is economically infeasible to build a new building given the maximum possible rent you could charge to live there. At that point no one builds new housing because nobody likes to lose money on purpose. So all new housing stops.
There is an interesting 'bubble' here in that with nearly 0% interest rates you can get away with higher costs, but that won't last.
[1] it is going to depend on interest rates on the building loan, city taxes, maintenance, etc. Every time I've looked at building an apartment it seems to flip over to generating cash 20 to 25 years after its built, assuming single owner etc.
About 44% of newly built units in 2014 are privately owned, so the other more-than-half are not.
I couldn't figure out how much of that is actually publicly managed (versus some potential third class), but they're already a significant part of the housing landscape of Berlin - and they have less of an issue with recovering costs over 25 years than individual house owners.
Money is fungable. It can be invested in anything. Yes apartments in Berlin might still be profitable, but other investments are more profitable and capital will move to those.
Investors expecting rising rents and investing lots of money also drives up the market value and thus the rent. Newly built houses are excluded from the regulation, so investors can still invest there.
With due respect, you haven't seen this happening nor been in one. I'm coming from India where Real Estate prices have grown exponentially in the last decade.
When rents are high, the Real Estate market goes up, not down. Since everybody thinks that they can recoup all building prices through rents, I've seen many of my friends buying homes at exorbitant prices and letting them for rent again to exorbitant prices.
New buildings are being built dime and dozen because rents are there to support them. People are no longer buying home to live, they're buying homes so that they can rent it out, because rent prices are high. A whole slew of new buildings are being built because they can rely on exorbitantly high rents.
Its a vicious cycle. Higher rent leads to more buildings being built. Once rents are high, it increases the costs of all goods: Hotels need to start charging more to cover rents, so do all grocery shops and everything else. Real Estate is one of the fundamental reasons behind creating the modern urban poor and homeless.
When you control rent prices, you stop buildings from being built for sake of letting out. Instead, buildings get built to really live. Like it or not, 40k inhabitants are coming in to live, rented or not. Controlling rents will allow for a sustained development. Otherwise, new buildings will shoot up as a business opportunity based on this 40k, and that will screw up everything else.
As somebody deeply affected by the ever-increasing rent prices, I believe Germany is doing the practically right thing.
New buildings are being built dime and dozen because rents are there to support them. People are no longer buying home to live, they're buying homes so that they can rent it out, because rent prices are high. A whole slew of new buildings are being built because they can rely on exorbitantly high rents.
Describes what most economists think of as inflation, not a social justice issue per se. Typically the limiter on this will be the supply of capital, and with zero percent interest rates there is very little limit. The way that works is someone borrows money X at 0.5% annual interest to buy a house which provides 3 - 5% of X annually. They borrowed at .5% and their return is 3 - 5% giving them 2.5 - 4.5% of "yield" for large sums people will do that for only 1 or 2 % yield. That is how markets allocate capital.
The housing market has limits on how fast or far it can grow. I'm very familiar with both the SF Bay Area markets which were over constrained, and the Las Vegas NV area markets which were largely unconstrained. Mortgage crisis aside, houses in the Bay area tend to increase because of contraints on new construction, and houses in Las Vegas tended to decrease because there were always new houses coming on the market so you had to "discount" the value of the house to get a buyer who would otherwise buy a new house.
In housing markets there is a tension between rent prices and mortgage prices. The cost of a mortgage results in a monthly payment X and rent costs Y. When Y > X people start buying places rather than rent them because not only is the cost lower per month, but when they transact out of the house or condo they often get some additional "equity" that has built up as a function of them paying down the mortgage and/or appreciation of the asset.
This however is unsupported : Real Estate is one of the fundamental reasons behind creating the modern urban poor and homeless.
Modern urban poor and homeless are a function of wage disparity.
Understand that a place has a relatively fixed amount [1] of housing, it also has a available various jobs near by. Those jobs pay a wage and a fraction of that wage is available to the landlords in the area as rent. It is impossible to raise the rents above the available wage fraction, people simply won't rent your space. This is why a house in Holland Michigan can only sell for $109,000 when the exact same house in San Francisco can sell for $1.5M. In Holland you are doing great if your job pays $60,000 a year, in San Francisco there are jobs that pay $200,000 a year.
So you take the amount of money being paid out to workers, and take the fraction of that people are willing to spend on housing. And you get the total available rent/mortgage dollars in a region[2]. That pool is fixed, but it isn't evenly distributed. So tech workers will bring home big pay checks and wait staff much smaller pay checks. And when the number of available spots runs out (priced out by the market dynamics like "close to work" or "good view") they are gone, and pressure is applied to create new spaces or try to capture more of that value by raising rents.
> As somebody deeply affected by the ever-increasing
> rent prices, I believe Germany is doing the
> practically right thing.
Can you share why you haven't switched over to owning from renting ? I am guessing that you must have looked into it, what are mortgage rates and median house prices where you live? No need to be specific about your location just sort of the market parameters that are keeping rents going up.
[1] It changes due to new building and old buildings being destroyed but much less quickly than the job opportunities change.
[2] We'll leave out places like New York or London where billionaires buy apartments but don't live there.
>> Can you share why you haven't switched over to owning from renting?
Yes, because you need a minimum X% upfront payment and all kinds of eligibility to purchase a house. For renters and people who can't afford that upfront cost (you can't take a loan to take another loan), they are left in a perpetual rental cycle. The others who are able to break out of that cycle once, go on to build more and more houses. So one group of people dream of living in their own house, whereas others build many and rent it out for half the rent. If you've seen the latest infographic about how being born rich gives you a golden spoon, and becoming rich is not about "working hard", you'll understand how these rental policies screw up people here.
And people also factor in the "rise of rental prices", so as long as you have money, you can buy a home loan now and bank on rental prices increasing soon. In around 4-5 years the rents would have increased enough to cover the mortgage, and then its time to start shopping for a new building.
Property becomes gold here partly because of the increasing rent prices. Even if you lose some money in mortage in the short term, anyways you also own the property which is increasing in value. So even people leaving a city will still retain their home and let it out for rent, rather than selling it back into the system. Buy buy buy, never sell unless you're in a financial emergency.
Home Loans are also different here. We have fixed rates (9.75-11%) and longer tenures.
>> Modern urban poor and homeless are a function of wage disparity.
No, its a function of wage rise. Doesn't matter how much you get paid, but as long as your salary rises the same as rental price rise, you can retain your home. If not, you lose your home, as simple as that. You can't leave the city because there are not much jobs anywhere else. So you have to stay, but if you can't retain your home it will take you on a trip closer and closer to the slums until you realize one day that you're in it.
Food is mostly government subsidized, so people can even manage the food. But housing is making a killing here. So when it comes to inflation, housing plays the biggest part and not food or transport. I can't give you fancy numbers though.
I see, so how long has this -- you can buy a home loan now and bank on rental prices increasing soon. In around 4-5 years the rents would have increased enough to cover the mortgage, and then its time to start shopping for a new building. -- been going on? 5 years? 10 years? 75 years?
There was an interesting article in Bloomberg about Mumbai in 2012 (http://www.bloomberg.com/bw/articles/2012-07-05/mumbais-boom...) with the rent control there causing huge market imbalances as India lifts millions of people out of poverty into the middle classes. It reads similarly to situations in Shanghai and Chengdu as a people's wages have risen faster than the housing market could keep up.
The reason I ask about how long it has gone on is that the situation you describe always ends up correcting at some point, (here in the US we called it the housing bubble), and when it does all the people who were betting on the ever increasing rents find themselves going bankrupt because rents cannot increase any further, and that puts them into a financial emergency where they sell, which depresses prices of houses, which results in other speculators also falling out of the market, and you get a really huge recession with lots of people going broke and a bunch of supporting industries (construction, remodelling, furniture, etc) being carried along as well.
Sorry for the late response, not sure if this thread is active anymore. By correction, I guess you mean a slowdown or stall of the rent rate rise. I'm just saying that enough damage is already done here, and what we'll see is just two extremes (obsession or recession). Given that so many people's livelihood depends on having a roof above their head, there has to be a better option.
I don't know exactly how Germany is planning to implement these laws. But at least I feel a sustained rate of growth should make life better for everybody in the city, rather than plain rent caps or slabs.
Thanks again for responding. By 'correction' I mean rents reverting to market rates rather than speculative rates. When that happens a lot of people will go bankrupt and often in those situations there is a time where things are cheaper than they 'should' be (by market forces). Foreclosed homes in the US was a good example of this, since the bank will sell at any price, it allows the price to go much lower than if people are selling.
When your loan holders get desperate because the loan is due and no one is willing to pay their extortionate rent, they will either go broke (lender reclaims the property and sells it at a loss) or reduce rents dramatically to insure 100% occupancy (lowering prices to capture more of the demand). Sometimes both, rents will go down and the people owning the buildings will go bankrupt.
If you're willing too, let me know what city this is happening in, I'd like to put it into my crawler to flag articles about rents to watch how this plays out over time.
This is a product of the EU's free movement and with that whilst the German people have a decline in birthrate the migrant population has not and as such any natural rise and organic growth in people has mushroomed.
On the flip side were these people move from leaves voids and some area's of the EU have become over-crowded and other parts are becoming ghost towns.
Still not everybody can look out the same port window, yet the EU free movement allows it and takes not into account the impacts and disparity of the members countries in the free movement aspect.
WIth that the German solution is not a solution, it will just create a privileged group who have a rent controlled place over those who can not get one at all.
10 years down the line for Berlin, it will be worse as they will shuift the price discrimination into one of space and with that, 10 people to a room hotspots and illegal housing will only grow.
When you have a supply and demand problem, the outcome is simple, but if you handicap that you just create a backlog of problem that piles up and in this case shifts from cost to supply or lack of and does nothing to address that from any angle.
Yes, this is going to be a problem, but will be seen as good by the people in the short term with shortsighted vision.
Do you have some numbers to back up your claim of immigrants being the major force behind the shortage? I could imagine it simply being movers within Germany. People are leaving the country for hyped metropolis.
https://en.wikipedia.org/wiki/Demographics_of_Berlin whilst not best data as does not give a cronological breakdown by demographic. Though you can see from historical growth and current demographic that it is not organic migration from within the country and if anything more the opposite.
I know that has been the case in London and whilst no rent controls we have all construction over a certain numebr of houses/flats (mostly flats) must be social housing/cheap. So it gets down to sneaky ways to play the figures.
But more people means more demand and when the ethnic demographic is declining in those places and yet the population is increasing then yes it is a very large factor.
Now the real issue and again very much tied into this would be companies love cheap labour so any way to increase access will be pushed with the political clout companies sadly have. This means wages get lower and that is the real issue.
How so, well if wages do not increase and demand for housing does then you get situations in which we get rent controls being introduced and whilst they seem good. They are address an effect and not the problem and that is the wages being kept low artificialy and that is done via increased access to labour that will price fight each other.
So one extra demand upon housing driving up prices is also a extra choice for jobs and driving down wages and with that we get hot-spot area's that need such intervention, sadly not the root cause, though that is not a simple fix.
Could also say the demise of the unions also played a large part in enabling a work environment and culture that allows exploitation of workers, wage wise. not everybody works at google or the like and with that many middle to low skilled jobs been driven down and semi-skilled jobs in which they would train people, why bother, just use high skilled people on low skilled wages, plenty to pick from.
New houses and big renovations are not affected by the regulation. If you want to get more rent you actually need to build newly/renovate run down houses.
This assumes that the ceiling to new unit construction is the market. I don't know Berlin, but in SF the main limiting factor is politics. If the cap is done right, you could keep construction at a similar rate (since you move the market equilibrium down, but not below the ceiling from politics).
Yes indeed, and I've watched the SF situation for over 25 years (I live further south in SV). That is part of the reason why I expect this will not have the effect Berlin or its residents want. The politics of stasis versus the politics of change, in SF many politicians vote for stasis, imagining a static city population which changes slowly, with vacancies created in line with people leaving. When in fact the city is trying to grow. I am quite interested to see how it is affected if the "bubble" bursts. My analysis suggests it will suffer a combination of a large loss of tax base and a large exodus of people post 'boom'.
There be no incentive to upgrade or maintain rental apartments/homes either with a rent cap.
so everyone endsup with crap accommodation.
For example some landlords would put in good kitchens, flooring, insulation etc and charge a premium for renting a better home. There be no incentive to do so in this case.
> Either increase the number of new apartments being built
I'm from Ireland, which has no rent controls, but recently had a property bubble which bankrupted the country. "Build more houses/apartments" isn't always a good idea.
I believe Berlin also has restrictions that buildings can only be a maximum of 6 stories? I may be off there, but that is what I remember from my semester there in 2009.
I suppose they've filled up all the cheap areas of former East Berlin now...
I don't think this will fly in Germany. Such are agreements are void and both parties know that. If they stop paying the higher sum, evicting the tenant is next to impossible.
"“The rent ceiling is very important for Berlin because the difference between the rent paid in existing contracts and new contracts is so high,” said Reiner Wild, managing director of the Berlin Tenants’ Association. “The other problem is that we have 40,000 more inhabitants per year. Because of this situation the housing market is very strong.”"
The incentive to build new rental housing will evaporate, and people who move there will not be able to find apartments. The problem isn't that your rents are increasing too quickly, the problem is that your economy is unbalanced and you're creating housing demand faster than you can provide it. Correct response? Either increase the number of new apartments being built or slow or stop the number of companies that are allowed to locate in Berlin.
This has happened before, will happen again. So take a moment and look at the environment around Berlin for housing now, and wait 10 years. Then look again and ask yourself is housing better or worse in this city?