Rents are going up – what can we do?

Gabriel Ahlfeldt

The Berlin Senate Department just released a new Mietspiegel. The Tagesspiegel reported and Christiane Scholz and Sevrin Waights commented in this blog. Rents go up – that's bad for the poor – and we need someone to blame.

So we have – or are running into – an affordability problem. While it is easy to complain about a housing affordability problem, it is more complicated to do something about it. So, realistically, what can we do to shift rents? Where do market rents come from? Obviously, rents, as any price, are an outcome of demand and supply. Hence, to lower rents, we can
a) reduce demand
b) increase supply
c) regulate the market.

What about a)? Can you prevent people from “demanding” housing space in a neighborhood? I think yes, you probably can – cut down school expenditure, stop cleaning roads and let public spaces rotten away. If that does not help, stop police and fire services. You see where this is leading...

What about b) Build more housing units, or grant permissions to (re)develop. With more housing provided, prices come down (unless demand is completely elastic). However, in most downtown areas you won’t fix an affordability problem by filling some empty plots. You will need to increase densities. But what do you think about residential high rise buildings around Kollwitzplatz in Prenzlauer Berg? Alternatively, should we get rid of open spaces? Who needs a “Volkspark” that most people don’t use for most of the year because it is too cold anyway? You see, that’s not that easy either.

To see the problem – I just gave a presentation at the University of Aberdeen showing (among other things) how historic (heritage listed) buildings in Berlin exhibit positive external benefits because of an increase in demand by people who like them. At the same time, they constrain supply (less floor space per land area). That means we could solve our affordability problem by replacing them with modern, functional, and dense housing units. You don’t like that vision?

So c) – regulate.
I understand the main problem is that the poor can’t afford to live in their preferred central “Kiez”, but we want to keep the social mix alive. So, again, what can we do?
Well, we can quite easily protect renters from increasing rents in the short run by rent regulation. Effectively, that’s what we are doing already. While, realistically, it takes some time before owners can pass on an increase in market rents to their tenants, you can, of course, always do more. However, this does not seem like a particularly targeted policy as all tenants benefit irrespectively from their economic background. And what happens if the gap between market and regulated rent is large enough? Landlords will offer their tenants a premium to vacate their flats – and guess who will take the offer – the rich or the poor?
So why not eliminate the market rent entirely and fix rents for vacant flats as well? The problem is, do you really think a landlord, even with the same rent, would not give preference to some tenants over others based on their social background? And don’t you think people would find a way to establish secondary markets?
Of course, you could push the system a step further and allocate tenants to regulated flats centrally, but maybe we don’t want to say “good-by” to property rights, not?

So maybe the other way round... If the poor can’t afford their preferred neighborhood, why don’t we give them more money so they can? The problem is (apart from the question where the money should come from) – what do you think this will do to demand (see a)? Yes, demand will go up – and – what does this do to rents? Right, you push the problem from the poorest to the somewhat less poor.
Another option, can’t we build affordable housing to get a social mix? We take money from private developers or force them to build affordable housing for the poor – just like in the UK! Great idea, but private developers don’t like the idea very much and prefer using their money for something else instead (by the way – private renters usually don’t like the idea either). Looking at housing affordability in the UK I don’t need to tell you that the system does not work very well.

So what can we do? I’m open to suggestions, but – I’m afraid – apart from preventing sever misallocations (e.g. holiday apartments that are empty for most of the year) – probably not too much.
If you look into research by my colleagues at the Spatial Economics Research Center you find that social inclusion, if at all, happens at a very early stage, i.e. primary (and perhaps secondary) education. Whatever we can do to improve chances of people to escape a “social trap” in first instance will be well spent money. We need to acknowledge that our society produces severe inequalities, but also that it’s hard to fix them with the housing market…


Gabriel Ahlfeldt is
-Lecturer in Urban Economics and Land Development at the London School of Economics
-Director of URBANCONTEXT Institute for Urban and Regional Research
-Affiliate of the Spatial Economics Research Center
-Director of the Urban Economics Group at the Center for Metropolitan Studies