Via Financial Times

Jörg Jahnke Dachbau, a Berlin roofing company, is facing a new year’s slump with few parallels in its history. “It’s an absolute disaster,” said its managing director, Joachim Meder. “I’ve lost €4.5m in orders. It’s as if someone’s just turned out the lights.”

The culprit is the Berlin city government’s plan to freeze rents for five years — a move critics describe as one of the most far-reaching interventions in the capital’s housing market since German reunification.

The legislation, which should come into force by March this year, is City Hall’s response to a lingering housing crisis that shows no sign of easing. Packed out with Brexit refugees, international party people and wannabe tech entrepreneurs, Berlin is in expansion mode, its population growing by 40,000 a year. Yet affordable housing remains scarce. Rents have doubled over the past decade, as new residential construction fails to keep up with soaring demand.

Katrin Lompscher, housing minister for the Berlin state government, admitted the rent freeze idea was “radical”, but insisted it was an appropriate reaction to a housing situation she described as “dramatic”. No other German city has seen such a sharp rise in rents over the past decade, she said, and with 85 per cent of Berliners living in rented accommodation, the housing issue was becoming “explosive”.

“We need new solutions,” she recently told reporters. “And that means not only building more flats but also protecting tenants from excessive rent increases.”

But economists, conservative politicians and the construction industry have reacted with outrage. Critics say it will have a devastating effect on Berlin’s investment climate, already unnerved by excessive bureaucracy and long planning delays.

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“Confidence in the legal system has been shaken, and when that trust is destroyed it takes a long time to rebuild it,” said Manja Schreiner, managing director of the Berlin-Brandenburg builders’ trade association.

She said the consequences were already being felt. Landlords have stopped all major building work, plunging tradesmen such as bricklayers, plumbers and electricians into crisis. “They’ve basically stopped doing everything but emergency repairs,” she said. “You’re seeing the first cancellations, with investments originally planned for this year declining dramatically . . . and order backlogs shrinking fast.”

The warnings of a slowdown have been rife, both from the private and the public sector. The BBU, a trade association that groups private and state-owned developers in Berlin and Brandenburg, says its members expect to lose €1.1bn in revenue over the next five years, invest €5.5bn less than planned and reduce construction by at least a quarter as a consequence of the rent freeze.

The law will freeze rents at the mid-2019 level for 1.5m flats built before 2014. For new rental contracts, it imposes an upper limit based on the age of the building and the quality of its fittings, ranging from €3.92 to €9.80 per sq m. Tenants whose rent is significantly above the upper limit can apply to have it lowered. City Hall estimates there are as many as 340,000 tenants who qualify for a lower rent.

Economists have warned of the damage the law will inflict on the Berlin housing market. The German Economic Institute in Cologne said in a recent study that it would reduce the value of some properties by more than 40 per cent.

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“Private investors in particular who entered the market starting in 2015 and bought flats in Berlin as part of their retirement provision could get into dire financial straits,” wrote authors Pekka Sagner and Michael Voigtländer.

But there is widespread popular support for the measure. For years, anger has been growing at private developers such as Deutsche Wohnen, Berlin’s biggest residential landlord, which has a reputation for renovating its buildings and then jacking up rents — although the company insists its rents are close to the Berlin average.

The anger over unchecked gentrification has spilled over into a campaign to expropriate Deutsche Wohnen and other big developers and take their flats into public ownership. Activists are collecting signatures to hold a citywide referendum on the issue.

German media have suggested that Michael Müller, Berlin’s Social Democrat mayor, pushed through the rent freeze as a way to appease the radicals in his government who back the idea of “socialising” the capital’s privately owned housing stock.

Mr Müller said in November that he had a message for private investors. “I say you can’t do what you want in this city,” he told Der Spiegel. “In this city, the government and administration sets limits.”

Opponents of the rent freeze hope Germany’s courts will respond. Chancellor Angela Merkel’s Christian Democratic Union is challenging the measure in Germany’s constitutional court, and is confident it will be overturned: it cites a recent legal opinion from the federal interior ministry, which found that Berlin’s regional government does not have the powers to restrict rents.

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Even if the measure is overturned, though, it could take years to rectify its negative consequences, said Mr Meder. “Thanks to the rent freeze, no one wants to invest in Berlin,” he said. “It is just not worth it any more.”