Forward to the Past: Short-Term Effects of the Rent Freeze in Berlin

Abstract

In 2020, Berlin enacted a rigorous rent-control policy: the "Mietendeckel" (rent freeze), aiming to stop rapidly growing rental prices. We evaluate this newly enacted but old-fashionably designed policy by analyzing its immediate supply-side effects. Using a rich pool of rent advertisements reporting asking rents and comprehensive dwelling characteristics, we perform hedonic-style Difference-inDifference analyses comparing trajectories of dwellings inside and outside the policy's scope. We find no immediate effect upon announcement of the policy. Yet advertised rents drop significantly upon the policy's enactment. Additionally, we document a substitution effect affecting the rental markets of Berlin's (unregulated) satellite city Potsdam and adjacent smaller municipalities. On top, the supplemental quantity analyses reveal a stark reduction of the number of advertised rental units hampering a successful housing search for newcomers, (young) first-time renters and tenants aiming for a different housing opportunity.

Gentrification and Affordable Housing Policies

“…Mense et al (2019) highlight an increase in investment and construction activity in unregulated segments of the housing market, as the demand for unregulated dwellings increases due to the shortage of supply in the regulated segment. Hahn et al (2021) analyze the short-term effects of Berlin's rental cap. They find an increase in advertised rents in the unregulated market of Berlin's adjacent regions indicating substitution away from regulated housing supply in Berlin towards unregulated housing supply in the city's periphery.…”

“…However, recent papers such as Mense et al (2019) also highlight an increase in construction activity and investment in the unregulated segments of the market. Hahn et al (2021) present reduced-form evidence on the short term impact of the rental cap introduced in Berlin which we consider. They find a decrease in the number of advertised dwellings as well as a decrease in rental prices directly after the rental cap was enacted.…”

“…Their findings are corroborated by our counterfactual simulation. However, due to the short-lived nature of the rental cap, Hahn et al (2021) can not provide evidence on longer term impacts of the policy, such as long-run supply changes, household relocation and changes in (endogenous) amenities. Conversely, our model simulates the counterfactual long term consequences of the rental cap when all margins of adjustment have been exploited.…”