Distributional effects of rent controls in Germany

Abstract

Lately, a boost in rental prices led the German government to bring in a law called Mietpreisbremse. This law corresponds to classical rent controls and enables every federal state government to announce tight housing markets within its state, in which rental prices of re-lettings will be capped. By now, in several big cities this law was put into motion and since then, re-lettings are allowed to be uprated up to a certain level of customary comparative rents only. As an exception, newly built flats or those that haven been reconstructed extensively are not affected by the reform.The reform's framework fits perfectly into a difference-in-difference (DID) setting, which is a well-known tool to recover the effects of a policy reform like the Mietpreisbremse. Though, in a standard DID only average treatment effects are identified, whereas researchers might be interested in distributional effects instead. Therefor, Athey and Imbens (2006) suggest a distinct approach to overcome the limitations of a standard DID. They call it Changes-in-Changes model (CIC) and their idea is to compare units according to their distributional outcome. However, the classical CIC is difficult to construct with covariates, which is an important feature to control for heterogeneity across housing units. To this end, Melly and Santangelo (2015) provide an extension of the classical CIC in order to include covariates.I will apply this method to newly offered rental prices in Berlin, which has seen the most rapid increase in rental prices shortly among German metropolises. The Mietpreisbremse was introduced to reduce this rental boom, especially in the lower and medium rental price segment. Using data on newly offered rental prices from 2014 and 2015, I will analyze the distributional effects of the reform.Preliminary results indicate that the reform indeed lowered newly offered rents on average. When considering the entire distribution, however, effects are found to be negative mostly in the upper segment. In the lower segment, on the contrary, newly offered rental prices declined only little.Moreover, the time trend of newly offered rental prices demonstrate that rental prices collapsed right after the reform's introduction, but continue to grow ever since. On these grounds, I cannot find evidence for the intended effects of the reform in the medium run.