Investment incentives of rent controls and gentrification: Evidence from German micro data

Abstract

AbstractWe empirically document that the effectiveness of the German rent control introduced in 2015 in achieving rental housing affordability is limited. Exploring the reasons for this limited effectiveness, we focus on the impact of the rent control on the yield on rental housing investments proxied by rent‐price ratios, which we derive by predicting sale prices to rental objects based on a hedonic model using micro‐level quotes on rental and sale listing. Exploiting the temporal, regional, and object‐specific variation generated by the design of the rent control, we identify a causal negative effect of the rent control on the yield of rental objects subject to the regulation. Furthermore, we zoom into the spillovers across regulated objects and objects in the affected markets that were exempt from the regulation and find rising yields for the exempted objects, suggesting that the regulation contributed to gentrification via a shift of rental housing supply away from the regulated segment.