Rent control becomes a hotly contested issue in Europe

In front of the Moabit Criminal Court, supporters of a left-wing housing project in Köpenicker Straße are protesting against his eviction. A woman is holding a sign with the inscription in English “A roof or your head a basic human right”.

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LONDON – Rent control is becoming increasingly popular in many European countries, but experts note that they rarely solve housing crises on their own and can even scare off investors.

Rent controls are government policies, whether at the local or national level, that aim to cap increases in house prices. They aim to keep housing affordable, at least for the most vulnerable parts of the population. However, the policy has its critics.

In Sweden, for example, rent control effectively overthrew the government. In Germany, the case was the subject of a year-long legal battle. Meanwhile, Dutch, UK and Irish lawmakers have all had similar discussions about their property markets.

The root causes

Speaking of the high prices in the Netherlands, Nic Vrieselaar, senior economist at RaboResearch, told CNBC that the market “is becoming unacceptable”. “It’s a matter of supply and demand due to the low interest rate environment,” he said.

There is an age-old trend of people flocking to urban areas where there are more jobs and higher wages. But, in an era of low central bank interest rates – which European countries experienced as a result of the sovereign debt crisis – and purchasing aid programs, more and more people have bought a property, either as a first home or as an investment. let. This demand then drives up prices given the limited housing stock on the market.

High-rise buildings in the Märkisches Viertel in Berlin.

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What’s more, the so-called “Airbnb effect” has made the situation worse, experts note. Rather than selling a property or renting it out for the long term, many homeowners choose to make their home or apartment available for short stays. This then means that there is less stock for the inhabitants, thus contributing to a further acceleration in rental prices.

Between 2010 and the first quarter of 2021, rents increased by 15.3% in the European Union, according to Eurostat.

Separate data collected by the European Statistics Office showed that in 2020 estimated average rent levels for apartments were highest in Dublin, followed by Copenhagen, then Paris, Luxembourg and Stockholm.

Colm Lauder, head of real estate at investment bank Goodbody, told CNBC he expects rental prices to continue to rise. He said: “In Ireland we fear that [rent] the controls will prevent capital from passing through. “

A vicious circle

Real estate investors see a significant downside to rent control as they cap yields. In the case of Ireland, rent increases in some areas are limited to 4% per year.

“If they can’t get [returns] then they will look elsewhere, ”Lauder said.

Private investment plays a crucial role in supporting the housing market, promoting construction and renovation. If investors find higher returns in other countries, they will likely move their funds there and supply will remain limited in that initial market.

However, not everyone agrees with this point of view.

Barbara Steenbergen, a member of the International Tenants Union and former lawmaker for the German region of Cologne, told CNBC: “We of course control pro rents if that is part of a complete housing package.”

She stressed the importance of rent controls for low and middle income families, noting that in Berlin, for example, rent increases have increased exponentially, but wages have not.

This cleavage is a “threat to social peace,” she said, while adding that she has not seen investments leak in any market where rents are controlled. One of the challenges is for investors to focus on luxury buildings and less on affordable and social housing, she said.

Ultimately, the solution may lie at the root of the problem.

“What I think needs to be done is increase the supply,” said Vrieselaar.

In a statement issued in 2018, the European Central Bank noted that “completed housing units in the euro area have remained significantly below their average level since the start of monetary union” in 1999. In addition, the ECB also said the lack of building permits and labor shortages have been an obstacle to improving supply.

But Vrieselaar suggested that governments should change the way they tax the sector, so they can better cope with the housing crisis. Essentially, he thinks the Netherlands should tax people’s wealth more, including their second and third homes, and reduce the burden on people’s income so that tenants have more room to spend their rent.

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