In front of the criminal court in Moabit, supporters of a left-wing housing project on Köpenicker Strasse are protesting against its eviction. A woman holds a sign that reads “A Roof or Your Head is a Basic Human Right”.

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LONDON – Rent pegs are 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 measures at the local or national level that aim to limit the rise in house prices. They should keep living space affordable, at least for the weakest sections of the population. However, politics has its critics.

In Sweden, for example, rent controls have effectively overturned the government there. In Germany, the matter was the subject of years of legal dispute. Meanwhile, lawmakers in the Netherlands, the UK and Ireland have had similar discussions about their property markets.

The reasons

Nic Vrieselaar, a senior economist at RaboResearch, told CNBC that the market was becoming “unacceptable” to talk about the high prices in the Netherlands. “This is a question 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 salaries. But in a time of low interest rates from central banks – which European countries have experienced in the wake of the sovereign debt crisis – and purchase aid programs, more people have bought real estate, either as a primary residence or as an investment. This demand then drives prices up in view of the limited housing stock on the market.

Skyscrapers in the Märkisches Viertel in Berlin.

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In addition, the so-called “Airbnb effect” made the situation worse, experts note. Instead of selling a property or renting it out on a long-term basis, many landlords make their houses or apartments available for short stays. This then means less inventory for the locals and thus contributes to a further acceleration in rental prices.

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

Separate data from the European Bureau of Statistics showed that the estimated average rental level for apartments in 2020 was highest in Dublin, followed by Copenhagen, then Paris, Luxembourg and Stockholm.

Colm Lauder, Head of Real Estate at the investment bank Goodbody, told CNBC that he expected rental prices to continue to rise. He said, “In Ireland we worry about that [rent] Controls will stop the flow of capital. “

A vicious circle

Real estate investors see a significant disadvantage with the rental price brake in the fact that they limit returns. In Ireland, rent increases are capped at 4% per year in certain areas.

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

Private investments play a vital role in supporting the housing market by encouraging construction and renovation. If investors get higher returns in other countries, they will likely move their funds there and supply will be limited in this initial market.

However, not everyone agrees with this view.

Barbara Steenbergen, a member of the International Tenants’ Association and former member of the German government district of Cologne, told CNBC: “We are of course in favor of the rental price brake, if it is part of a comprehensive apartment package.”

She emphasized the importance of fixed rent prices for families with low and middle incomes and pointed out that, for example, in Berlin rent increases have increased exponentially, but salaries have not.

That gap is a “threat to social peace,” she said, adding that she has not seen investment flight in any market with rental controls. One of the challenges is getting 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 to increase supply,” said Vrieselaar.

In a statement published in 2018, the European Central Bank stated that “housing completions in the euro area have remained well below their average since the start of monetary union in 1999”. and labor shortages have been an obstacle to improving supply.

However, Vrieselaar suggested that governments change taxation on the sector so they can better cope with the housing crisis. In essence, he believes that the Netherlands should tax people’s wealth, including their second and third homes, more heavily and reduce people’s income burden so that tenants have more room for maneuver on their rent.