Berlin’s failed rental revolution - Exberliner
8.8.2022 - How Berlin went from cheap rents to a housing crisis, saw its rent cap defeated and what will happen next with calls for expropriation.
Nick saw it all coming. In the early 2000s, while some Berliners were spending less on rent than on beer, Nick and his partner took out a mortgage on an apartment in Kreuzberg. Friends were puzzled.
“My German friends told me I was crazy for buying a flat when it was so cheap to rent,” says Nick, a Canadian importer. “They thought Berlin was immune to what was happening elsewhere. But I lived through one property boom in Vancouver. I knew what was coming.”
Today Nick pays no rent, and his apartment is worth at least five times more than it cost. But his paper profit brings little comfort: selling would only require buying again at today’s fast-rising prices. And money can’t buy what doesn’t exist.
Berlin’s housing drama is a story of knock-on effects: ignorant optimism – leaderless capitulation – ill-fated regulatory resistance – crushing legal defeat. But Berlin’s rental revolutionaries haven’t given up hope.
Finding a rental apartment in Berlin in the early 2000s was as simple as walking down the street and ripping a tab off a “Zu vermieten” flyer. If you didn’t mind coal heating and shared hallway toilets, Berlin was your oyster.
Most real estate investors were scared away by the lack of viable industry, and a militant anarcho-leftist scene which burnt cars to defend its territory. Cowed by a guilty conscience and an oversupply of flats, mainstream-voter landlords showed unusual pricing restraint.
At the turn of the millennium, around five percent of Berlin flats were vacant (today it’s less than 1 percent). In 2002, the average rental price was €6.07 per m2 (it’s now €10.55 per m2). Demand was so low that the city’s public investment bank called for “necessary measures such as demolition and de-construction.”
Berlin’s leaders found another way of getting rid of property. The neoliberal SPD mayor Klaus Wowereit and his finance minister Thilo Sarrazin saw the city’s publicly-owned apartments as a piggy bank to pay off the city’s enormous debt.
That strategy amounted to a fire sale of its assets. Between 2002 and 2007, Wowereit’s SPD, in coalition with Die Linke, sold off more than 110,000 flats – almost one third of the city’s housing stock. In one sale, 66,000 apartments were sold to investors including Goldman Sachs for €405 million – or €6000 for each flat.
Only one regulation existed to control prices, capping increases at 20 percent over three years on existing contracts. But there were no limits on how much landlords could charge for new contracts. Sharp-eyed investors saw through the rhetoric of strong tenants’ rights, realising there was room for exploitation and no penalties for infringement.
With the Berlin Wall long gone, waves of international capital flooded the property market. The ‘tide that lifts all boats’ became a tsunami that smashed all cities, though the money took a little longer to wash up the Spree.
In response to the 2008 global financial crash, governments printed trillions of dollars, euros and pounds and slashed interest rates, hoping investors would fund new job-creating activities. Instead they bought up undervalued assets with easy returns.
Between 2009 and 2018, investors spent €139 billion purchasing old buildings in Berlin, and only €16 billion building new ones, according to research by Die Linke. During the same period, around 20 percent of the city’s properties changed hands.
By 2017, Berlin was experiencing some of the biggest property price increases in the world. The following year, Berlin was declared the number one city in Europe for property investment.
Rental prices were levelling up to match cities such as Madrid and Milan. But incomes had failed to keep pace. Even today, the majority of Berliners spend more than 30% of their income on housing – a rate economists consider to be both unaffordable and unsustainable.
Too little, too late
Politicians made moves to slow the spike. In 2013, Berlin limited maximum allowed increases on existing contracts to 15 percent over three years. In 2015, the Federal Government ruled new rental contracts could only be 10 percent above average official prices, though the law was largely ignored: one report found 95 percent of all new property listings were priced above the legally allowed amount.
By 2018, Berliners were finally furious about property prices. A demonstration against Mietenwahnsinn (rental madness) drew thousands of participants – newspapers said 13,000; demo organisers counted 25,000. Among their demands? The expropriation of investors’ properties.
The rent freeze
Spooked Berlin politicians responded by offering a more moderate, yet still extraordinary reform: instead of seizing private property, they proposed freezing all rental prices for five years.
The idea, first floated within the SPD, was endorsed by Berlin’s governing coalition parties, including the Greens and Die Linke, and despite internal disputes and heavy opposition, it made its way into law. On January 30, 2020, the Berlin parliament voted on the Act for the Restriction of Residential Rents in Berlin, better known as the Mietendeckel, or rent cap.
“It’s the biggest and most important reform in the city since the fall of the Berlin Wall,” said Rainer Wild of the Berlin Tenants’ Association at the session.
The Mietendeckel effectively suspended the free market for rental property in Berlin, a city where rentals dominate the property sector. It stopped most price increases for five years, except for flats built after 2014, to create an incentive for new developments. It mandated rent reductions for leases worth over 20 percent of average official prices. Cheating landlords were threatened with fines of up to €500,000.
Opposition parties and the real estate lobby were astounded. They mounted a PR offensive using the slogan “Bauen Statt Deckeln” – build, don’t cap – which claimed, falsely, that the Mietendeckel discouraged investors from building new apartments. Opponents brought a case before Germany’s Federal Constitutional Court. For almost a year, Berliners endured a cliffhanger wait to see if judges would uphold or kill the great rent freeze experiment.
“The Mietendeckel is void” was the court’s April 15, 2021 verdict, declaring the city’s attempt to control rent prices unconstitutional because only the federal government was entitled to regulate rents. Gleeful landlords demanded rental back-payments, some worth thousands of euros.
When the rent cap was overturned, acivists looked for other ways to combat rising rents. Photo: IMAGO / IPON
Then, in November, came a second devastating legal decision. The Federal Administrative Court ruled that governments could no longer buy property using Vorkaufsrecht, or right of first purchase, which had allowed the city to forcibly acquire more than 12,000 private apartments and put them in public or cooperative hands. Within the space of months, Berlin had lost its two most powerful weapons to control property prices.
Landlords strike back
For more than a year, the Mietendeckel kept rents in check. During that time, some landlords kept their flats off the market, preferring no income to reduced profit while awaiting the court decision. One study found there were 60 percent fewer advertised flats during the Mietendeckel-era.
Those have since bounced back – along with rental prices. Another analysis found Berlin had experienced the biggest rental price increases in all of Germany.
Another impact of the Mietendeckel was to speed up the conversion of rental apartments into private residences. With prices at record highs, many owners decided to cash out and sell their properties rather than lease them, leading to a huge drop in potential rental properties.
Potential buyers are paying high prices. In 2021, average buying prices hit €5416 per sqm, nine percent more than in 2020. But a bigger problem than cost is the highly competitive market.
Every rental property listed is hotly contested, according to the portal ImmobilienScout24. Buying is also a battle: up to five interested owners register for each available property weekly, and most have to bid above the asking price to secure a purchase.
The remains of the day
What hope remains for Berlin’s tenants, now that the Mietendeckel is dead, and judges have barred the city from purchasing properties via Vorkaufsrecht?
Germany’s top courts have made it clear: only federal government intervention is allowed in the property market. But the current governing coalition shows little appetite for major reform, mostly due to resistance from the neoliberal FDP party.
The federal coalition agreement between the SPD, Greens and FDP promises only to maintain the existing Mietpreisbremse, or rent brake, the legislation that caps new rental contracts at 10 percent of average prices. For existing contracts, the maximum allowed rental increase could be set at 11 percent over three years (down from the current 15 percent).
However, bringing legal action against deviant landlords will be up to tenants And even then, tenants are limited to reducing their rent to the legal maximum, but only from the date they lodge their complaint.
A new dawn
Housing activists weren’t satisfied with such incremental change. They’re now waging an even bigger battle to secure a truly ground-breaking revolution. The initiative Deutsche Wohnen & Co. enteignen is demanding that the Berlin city government use an obscure constitutional provision to forcibly acquire the property of any owner possessing more than 3000 apartments.
Advocates say it could bring over 240,000 flats into public ownership to better control rental prices, and argue it should cost around €8 billion. Its opponents – including all political parties except Die Linke and the Greens – argue it would cost around €36 billion, which is a little over the city’s current annual operational budget.
The idea captured the imagination of most Berliners. The enteignen campaigners collected tens of thousands of petition supporters and triggered a referendum. With the rent freeze melted, and little visible political appetite for reform, many Berliners saw mass expropriation as the only remaining solution to price spirals. In September 2021, the enteignen proposal received a greater percentage of votes than the winning coalition parties.
Despite the overwhelming democratic mandate, the SPD under new mayor Franziska Giffey is staunchly against expropriation. Instead of implementing the idea as demanded by voters, a so-called expert commission was set up to examine the proposal and provide a recommendation. Few expect a positive outcome. Even if the city’s politicians obeyed voters and implemented Enteignung, the expropriations would almost certainly be challenged in the courts, which have a track record of supporting investors.
Failure of the enteignen initiative could leave its million-plus supporters feeling defeated, disillusioned and disenchanted with democracy. Or it could spawn a new generation of outraged activists seeking even more radical means to fight investors. Win or lose, the enteignen campaign will reshape the city’s property politics for years to come.
After two decades of property price hikes and political failures, activists have learned the lesson: if you want a minor reform, demand a revolution. And if you get your revolution, prepare for revenge.