Market Dialectic

Published on 2013/07/23

Midway through the absurd election debate over rent control, the following news break: The pace of rental growth is slowing because construction has picked up. That is the way a market economy works. The market is smarter than those politicians who are discussing rent control measures and tax breaks.

  1. For some years, Germany’s metro areas have experienced a housing shortage.
  2. As a result, rents have gone up as demand outpaces supply.
  3. This results in turn in an increase in construction activity because it has become a paying proposition again. Supply on the housing market grows.
  4. The next consequence is that rental growth slows because more housing is coming onto the market.It is precisely this causal chain that the latest figures (above) bear out.

The development of recent years qualifies as a classroom or textbook example for students of business administration to demonstrate the workings of a market economy.
Whenever the government intervenes with a housing policy of its own, things tend to take a radically different turn:

  1. The housing supply is drying up.
  2. Policymakers impose a rent cap making housing unprofitable for investors.
  3. Construction takes a downturn while rent rates keep going up.
  4. Tax breaks are introduced to stimulate housing construction.
  5. An excessive construction boom results in vacancies and declining rents.
  6. Eventually, tax money is spent to raze the excess supply in housing (as previously seen during the urban redevelopment program in East Germany (“Stadtumbau Ost”)).

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