Will our smiles freeze along with the frozen rent?

Rent regulation is a hot political trend in major world cities. Zohran Mamdani in New York or Die Linke in Berlin primarily win due to voter frustration with unaffordable housing, and rent freeze is one of the main proposed policies. Experiences from Germany, Catalonia, and the United States, however, show us that if we regulate only part of the apartments, the rest will become more expensive.

While the fascist AfD gradually dominates regional elections in Germany, alarmist and relativizing comments about the success of the left-wing Die Linke in Berlin elections have filled pages of Slovak and Czech media. They compared Die Linke to AfD, both labeling equally extremist, attributed pro-Russian sympathies to Die Linke (which, in principle, left with the departure of Sahra Wagenknecht) and similar.

However, this article is not about debunking the theory of the horseshoe, but about one of the main points of the program for which people in Berlin voted for Die Linke: housing affordability. “Berlin affordable” (“Making Berlin affordable”). Or, as Zohran Mamdani promised in the elections, with whom Berlin’s Die Linke consulted on the electoral strategy: “Freeze the rent” (“Freeze rent”).

While regulation of market rent is essentially a non-existent concept in Slovakia (with the exception of a small percentage of apartments owned by municipalities, which are governed by price regulation by the Ministry of Transport), many Western countries (including the United States) have used or are using rent price regulation for some part of city apartments.

Most economists fear price regulation as the devil fears the cross. Artificially lowering prices “below the natural equilibrium” of the market supposedly leads to a decrease in supply (number of apartments) and a housing shortage. Alternatively, if a city regulates only part of the apartments, unregulated rents will rise even faster. At least, that’s what microeconomic theory says. Supply and demand, equilibrium.

On the other hand, for voters in cities suffering from high housing inaccessibility (such as New York and Berlin), it is an obviously mobilizing issue. Mamdani’s or Die Linke was largely supported by young voters (mostly unable to buy their own housing): in New York, youth turnout under thirty increased by thirty percentage points, in Berlin, nearly half of young people voted for Die Linke. For these people, rent regulation is not a theoretical exercise in an economics textbook; it’s a matter of survival.

Recent years have brought several high-quality quasi-experimental cases of implementing rent regulation, from which economic studies have been published: rent regulation in Germany since 2015 and a two-year rent regulation in Catalonia from 2020 to 2022. We will show that even the issue of regulated rents, as is usually the case, is more complicated than it appears at first glance.

The law that doesn’t need to be obeyed

In 2015, the German federal parliament passed a law allowing German municipalities to freeze or regulate rents. The regulation takes the form of a price ceiling reflecting the average rent development over recent years. However, new-build apartments (after 2014) are exempt. Also, older apartments that have undergone significant renovation can set their initial rent above the ceiling after renovation. Nearly three hundred municipalities, including major cities like Berlin, Hamburg, and Bremen, introduced such regulations.

A study published in 2023 used this two-speed rental market (regulated and unregulated apartments) to examine what the regulation actually achieved. Simply put, such intervention acted as a one-time subsidy for those living in regulated apartments. Rents in these apartments decreased, but within two years, they returned to the same level as before regulation. At the same time, rents in unregulated apartments grew faster. After a few years, the growth trend in both groups evened out. This intervention also led to a higher rate of demolition of old buildings. The authors of the study argue that regulation increased land and new construction values compared to old buildings (since new apartments had an exemption from regulation). However, more new rental apartments were not built. As owners of old apartments might say: “If I am to earn less on this apartment than before, I’d rather have no one living in it at all.”

All this sounds like confirmation of classical economic theory. If we regulate only part of the apartments, the others will become more expensive. But there is an important “but.” This study, as well as another from 2022, which also examines German rent regulation, highlights a key weakness of German regulation: the lack of enforcement of rules. German rent regulation was a matter of civil law, so tenants faced no fines or sanctions. The only protection for landlords was courts—if you felt your landlord increased rent beyond what regulation allowed, you could sue. If successful, you would recover only the difference from the rent ceiling.

No wonder that unenforced regulation doesn’t work well. It’s like introducing parking policies without fines for parking violations. Lowering the maximum allowed speed and then not measuring it. Property owners have no internal motivation to voluntarily cut their profits.

Preferably universal rather than selective

The Catalan government in 2020 approved a comprehensive rent regulation in all municipalities with “tense” housing markets. Unlike the German model, Catalan regulation covered all apartments in the respective municipality. More importantly, enforcement was much stricter. Landlords had to specify the rent ceiling in advertisements and contracts under threat of fines up to ninety thousand euros. The burden of protecting tenants and enforcing fines was on the government, not on individual court cases.

A study from 2023 describes the consequences of this short experiment—short because in 2022, the Spanish Constitutional Court declared this law unconstitutional and abolished the regulation. Paradoxically, this provided economists with excellent quasi-experimental conditions. The results are somewhat similar to those in Germany: regulated apartments saw a sharp rent decline. The subsequent rent development after regulation in cities with and without regulation was also similar. However, unlike the German experience, rents in Catalan unregulated cities did not increase, and the supply of apartments did not change (apartments did not stop being rented). When the constitutional court abolished the regulation, rents jumped back to pre-intervention levels.

Thus, the Catalan example seemingly refutes basic supply and demand rules: apartments did not disappear from the market, and unregulated apartments did not become more expensive. A major difference from Germany is the comprehensive regulation. When rent regulation covers the entire city, the market behaves completely differently. Apartments are not like buns—an apartment in Barcelona cannot simply be replaced by one in the town of Arbúcies, more than eighty kilometers away from the metropolis, without a direct train connection.

Who builds, who lives, and who waits?

Comprehensive rent regulation is called “first-generation” regulation in academic literature, while Germany’s selective approach represents “second-generation.” Theory predicts that the first generation will lower rents but not produce enough apartments for everyone who would like to live at that price. The second generation, on the other hand, predicts a smaller decrease in the number of apartments but higher prices for everyone not living in regulated apartments. The German example seemingly confirms the second theory at first glance; the Catalan experience, however, does not (though it was a short period).

Let’s also acknowledge that long-term, comprehensive regulation would reduce the number of apartments that are theoretically built (a survey of many American cities shows that regulation generally reduces the supply by about ten percent). However, today, there are not “enough” apartments—especially for those whose incomes do not allow them to reach market prices. Today, who, where, and when people will live depends on their ability to afford housing.

“Distributing” apartments to people can also be done differently: moral philosophers have developed the ethics of queuing. Queues organize people not based on their abilities, wealth, or connections, but solely on time: each new applicant joins the end and must wait until their turn comes. The popularizer of this ethic, philosopher Michael Sandel, who writes about it in his book What Money Can’t Buy, also describes in his newer book The Tyranny of Merit another tool—this time in the context of selecting students for elite universities. A lottery. It admits that even seemingly objective criteria for selecting applicants to the best universities in the world are ultimately a matter of luck and chance.

Both queues and lotteries are, of course, egalitarian; a place in line or a better chance in a lottery cannot be bought. However, distributing housing differently than based on ability to pay is heavily limited by ownership: municipalities or the state cannot allocate people into privately owned apartments. That’s why public ownership is so crucial in the housing debate. As we said, an apartment is not a bun—an apartment in one part of the city is irreplaceable with one in another part, and an apartment built by a private developer will behave differently than one built by public authorities. That’s why most studies on rent regulation, especially in the United States, confirm that it causes a decrease in the number of apartments: they are privately owned, and owners continue to maximize profit even when regulators cap prices.

It was the “fathers” of classical economics, like Adam Smith and David Ricardo, who were extremely critical of landowners (“landlords”). They considered them an unproductive layer of society, who burdened the working and entrepreneurial classes by collecting rent. Adam Smith, in The Wealth of Nations, said they “reap where they have not sown” and that “their income costs them no labor or worries, coming as if by itself.” David Ricardo, whose theories of comparative advantage are often misused to justify uncontrolled globalization and “free” markets, wrote: “The interest of the landowner is always in conflict with the interest of every other class in society. It never prospers more than when food is scarce and expensive.”

Even for classical economists (who cannot be suspected of hidden Marxism, as they wrote decades before Marx), monopolistic or private land ownership and rent extraction were problems—even within a market economy. Rent regulation is therefore the less interesting part of Die Linke’s electoral program in Berlin. The more significant part is their plan to expropriate rent-controlled apartments owned by large commercial investors. They aim to remove market rules and financialization from housing, which in the end will increase the availability of affordable housing more than rent regulation.

Vienna, often praised, does not lead in quality of life and housing affordability because of rent regulation, but primarily because of its unparalleled high proportion of apartments owned by the city or other non-profit groups and projects. The foundations of this success were laid during the interwar period of “Red Vienna”: socialist leadership built tens of thousands of new municipal apartments, financed mainly through high taxes on luxury goods and private, commercial housing. These policies were complemented by rent regulation and tenant protection, but the key was massive construction and high progressive taxes.

Therefore, if we want to achieve truly affordable housing in Slovak cities, pure rent regulation will not suffice. We agree with mainstream economics that we need to “build, build, build.” The only question is who builds. If we truly want to be inspired by Vienna, we should significantly increase property taxes, especially on apartments where owners do not live. Ideally, along with other taxes on luxury consumption (which also have a detrimental effect on pollution and climate crisis) or wealth. And let cities build apartments on a large scale. Then we can regulate rent as well.

The author is an economist and data analyst

The text was created with the support of the Friedrich Ebert Foundation, representation in the Slovak Republic