Rising rents in German cities have led to an intense debate about the need for tighter rent controls in housing markets. In June 2015, the so-called rental brake was introduced, which imposes upper bounds for rents in new contracts, in order to immediately slow down the increase of rents in tight housing markets. Since then, 11 federal states made use of this instrument. We take advantage of this intra-country variation and test whether the regulation had a causal effect on rents and house prices in the short run. We apply a standard difference-in-differences setup that allows us to study the effects of the rental brake on the underlying price trend in neighboring treated and non-treated postal-code districts. We ground our analysis on a large sample of online advertised rental dwellings and find that, contrary to the expectations of the policy makers, the rental brake has, at best, no impact in the short run. At worst, it even accelerates rent increases both in municipalities subject to the rental brake and in neighboring areas. We further conclude, based on our estimates on the development of dwelling prices, that investors expect on little impact on future rental income.

Housing market regulation and, in particular, rent controls are subject to longstanding debate amongst scholars: almost every textbook on housing and real estate economics addresses these issues (see, e.g. McDonald and McMillen, 2010; O’Sullivan and Irwin, 2007)— most likely because housing markets are subject to substantial regulatory interventions in almost every market economy around the world. In situations of tight housing markets, affordability is also a major concern of politicians during election campaigns. For example, Harry S. Truman won the race for the White House in 1948 by highlighting that resolving housing shortages would be a key action point in his electoral program, his Fair Deal (Von Hoffman, 2000). Affordable housing remains a vibrantly debated topic: in the light of sharply increasing rents in urban areas in Germany, the Social Democrats succeeded in launching a discussion around the need for stricter rent controls in the German Bundestag elections in 2013 (Knaup et al., 2013). Housing also played a major role in the 2015 UK general elections, with every party setting up an agenda to slow down rent increases and to stimulate construction of affordable homes (Kelly, 2015).