This is the third and final chapter in my three-part series about the development of Berlin’s housing market from the city’s division to today. To get some background for today’s episode, housing in the reunified city, you should check out episode one, housing in the divided city and episode two, housing in the reunified city.
Today, I’m going to examine Berlin’s dynamic housing market and the contradictory effects of housing policy in the city.
I left the last episode with the beginning of gentrification. Berlin is similar to other large cities in a lot of ways, but it also has its own specific issues, most of which stem from division and reunification.
Let’s start with the basics. After a long phase of population loss during division, Berlin’s population jumped in the 1990s, then stagnated and dropped through the 2000s. The city had another growth spurt from 2005 to 2010, followed by another slump and, since then, strong growth.
The uncertainty of the post-reunification years, combined with delays in the construction of new housing (because of property restitution, fluctuations in local and global housing markets, lack of demand due to a stagnating or shrinking population, and the global economic crisis of 2007-2008, among others) means that the city currently suffers under significant housing shortages. New construction is the watchword. I can’t tell you how many empty lots I’ve seen disappear over the last ten years.
The problem with new construction is however, even if the developer makes an effort to build in a cost-efficient way, new construction will typically be more expensive on the whole than existing buildings. In addition, the economic rationale of profit maximization combined with entrepreneurial city tactics means that developers typically build for financially strong renters and purchasers. Since Berlin’s division meant that construction was unattractive and the future was uncertain, there were a *lot* of empty lots available following reunification.
If you’re a renter with a standard, rent-controlled unlimited lease, your rent can be increased by up to 15% every three years to adjust to overall increases in rent prices in the city (as established through the officially-released Mietspiegel). This represents a moratorium on the usual 20% increase cap put in place by the Berlin Senate until May 10th, 2018. You can check out more information in German here. Higher rents in new construction drive up the overall mandated rent level (the Mietspiegel), which is the basis upon which landlords are permitted to “adjust” existing, rent-controlled contracts. As a consequence, in areas with high tenant fluctuation and lots of new construction, the Mietspiegel will rise faster, which means that prices in existing rental contracts can be raised faster.
Landlords also have a second tool for raising rents which is connected to a separate paragraph of the BGB and therefore independent and additive to Mietspiegel adjustments: modernization.
Mandatory modernization cost-sharing has become one of the most thorny issues in renter policy, since tenants are legally required to accept the apportionment of costs (11% of the cost of the modernization measure divided by the number of tenants affected) unless they would suffer a financial or other hardship through the apportionment.
What does that mean in a concrete way? Well, typical modernizations that affect whole buildings could include the addition of external insulation on the facade, the construction of elevators, or the addition of new insulation in the roof. The respective monthly rent increase could well exceed the 15% possible through a Mietspiegel adjustment, depending on how costly the improvement is.
Thus, a landlord with tenants who are paying below-Mietspiegel rents in a building without extensive modernizations could theoretically raise the rent by up to 15% (Mietspiegel adjustment) and then add an elevator or external insulation, thus increasing the rent further. I know of a case in the district of Friedrichshain where the landlord is using exactly this combination of tactics to raise the warm rent in an existing contract from 8€ per square meter to 11€ per square meter (new rents in that neighborhood are 14€ per square meter cold).
The personal effects of these various tactics vary depending on the financial status of the tenant. If either of these rent increases represent a financial hardship, then the landlord is not legally allowed to raise the rent/apportion the costs. In order to prove a financial hardship, the tenant is required to provide extensive financial information. Even then, the landlord can sue. And there are also less scrupulous ways to rid oneself of tenants paying low rents (scaffolding with large-format advertisements on the facade, lack of upkeep, lawsuits, turning off utilities, drawn-out periods of construction and “modernization,” etc.). However those tenants not on social welfare benefits but with modest means have at least this legal recourse against rising rents.
Those with a solid financial situation have the option to buy an apartment and thus protect themselves from the whole situation. More about this in a moment.
Those most risk of financial hardship from rising rents are the middle class, i.e. those earning enough to no longer be eligible to claim a financial hardship, but for whom affordable housing could mean the difference between having financial security or a financially precarious situation. Those most affected by this situation are young families – families are increasingly choosing to stay in smaller, affordable apartments even after the second or third child. So while the amount of living space per person in Germany is increasing on the whole, in Berlin’s inner-city the precipitous rise in rent prices has meant that households that might once have moved to a larger apartment are now staying put and finding new solutions in their existing space.
But what about purchasing? Despite the fact that Berlin is historically a renters’ city (the homeownership rate was only 17% in 2015), apartments for purchase represent a growing segment of the housing market in the city, particularly in new construction. Thus, new construction of housing will likely not directly alleviate the (rental) housing shortage unless the construction focus shifts away from apartments for purchase.
The conversion of rental housing into condominiums is also a serious concern. The rent and purchase price increases over the last years combined with record low interest rates have made property a particularly good investment. The Berlin Senate has instituted a city-wide eviction protection measure – tenants in rental properties which are converted into condos today have a 10-year protection period from being evicted by the owners so that they can use the property themselves. This is not the case for condos which were converted then rented – those tenants have the legally-mandated eviction notice period which is dependent on the length of time that they have been living in the apartment (minimum 3 months).
These eviction protections have put a lot of pressure on both newly-constructed housing and empty apartments. Significant increases in purchase prices (5 to 24% increases in 2016 compared to 2015 prices – purchase prices in the city rose on the whole by 9.6% in 2016) mean that, when tenants move out, landlords have a significant financial incentive to convert single apartments into condos.
All in all, it can be said that:
- Population increases and decreases in available housing stock (for example through condo conversions) are putting extreme pressure on already scarce rental housing.
- In an unregulated market situation, this would lead to an increase in prices. This is obvious in the very high new rent prices relative to existing rent prices (more than double in some districts).
- The shortage has also led to a large amount of new construction, which is now very lucrative. Much of this new construction is apartments for purchase. Where rental units are being constructed, the average rental price is relatively high compared to existing rent prices in the area.
- High new rental prices for existing housing stock and for new construction both raise the Mietspiegel, which opens the door for rent price adjustments in existing contracts. In addition, landlords can also modernize and force a further, additive rent increase as well.
What can be done?
We need to find a way to reduce construction costs and thus ensure affordable but still cost-effective housing provision – this was one of the topics at the German Federal Congress for Urban Development Policy in June. We also need to revive social housing provision for large portions of the population, including subsidies to social housing developers. Last but not least, if the EU and the federal government want modern, energy efficient housing stock in order to meet climate goals and the needs of an ageing population (i.e. modernization), then they should carry at least a portion of these costs to offset the burden already placed on renters.