Annual report 2016/17: Council of Economic Experts calls for an end to the rent cap

Germany's Council of Economic Experts (Sachverstaendigenrat) calls for the abolition of the rent cap (Mietpreisbremse) in unmistakable terms in its 2016/2017 annual report. It is counterproductive to "weaken market forces on the basis of supposed market failure," the report states. Berlin has applied the rent cap since June 2015 and sits at the centre of this debate.

The Council fears that the rent cap shrinks the supply of rental housing and discourages construction investment, particularly in the affordable segment. Special depreciation allowances and a higher volume of social housing construction cannot offset an already weak appetite for investment. This approach has proven inefficient in the past.

Demand pressure meets structural cost drivers

The report does not dispute that pressure on the Berlin market is undiminished. Between 2008 and 2013, the population in rural areas fell by 1.7 percent while it rose by 1.1 percent in the cities. According to the experts, persistently high migration and shrinking household sizes are the main drivers of demand pressure. At the same time, they point to rising permit numbers that will expand supply over the medium term.

In their view, prices are pushed up less by market participants than by the framework conditions: high land, planning and construction costs, extensive regulatory requirements, and ever more demanding energy efficiency standards. That diagnosis is shared by many actors on the Berlin market, particularly in boroughs such as Neukoelln or Friedrichshain-Kreuzberg, where the tension between upgrading pressure and supply scarcity is most visible.

Subject support instead of object support

More clearly than the yes or no on the rent cap itself, the Council argues for a different funding route. Instead of subsidising properties, support should go directly to households in need, for instance through an adjusted housing benefit (Wohngeld).

In social housing construction, object support via special depreciation allowances carries the risk of windfall effects, because households that do not depend on it also benefit. Furthermore, a uniform federal subsidy tied to per-square-metre prices is poorly targeted when regional starting points differ as much as they do between Berlin and the shrinking provinces. A corresponding draft law had recently failed in any case.

Reading the report

The report has no immediate legal consequences. It does noticeably sharpen the debate about the effectiveness of the rent cap, especially because it does not come from lobby associations but from the federal government's top advisory body. We see the report less as a demand directed at any single legislator and more as a call to take an honest stock of market developments and the effect of political interventions, particularly in Berlin.

The full report is available here.