(Bloomberg) --
Berlin's attempt to curb a surge in housing costs could reduce the value of some properties by more than 40% and cause considerable damage to the city's economy, according to a leading research institute.
The German capital's left-leaning government plans to freeze rents for five years and impose an upper limit based on the age of properties. The legislation, which Deutsche Wohnen SE, Berlin's biggest landlord, says is already crimping investment, is expected to come into force in the first quarter of next year.
Read more: Berlin's Biggest Landlord Says Rent Fix Sparks Investor Backlash
Rent reductions “will lead to a significant drop in asset values and many landlords run the risk of succumbing to over-indebtedness,” IW institute economists Pekka Sagner and Michael Voigtlaender wrote in a report for the Christian Democratic Union party, which is in opposition in Berlin and opposes the measures.
The city government's plans “threaten to cause considerable damage to both the housing market and Berlin as a whole,” they wrote. Scrapping the measures is “urgently needed from an economic perspective to prevent wider damage to the Berlin economy,” they added.
Owners of homes whose leases are due for renewal, and are currently rented for well over the recommended amount, will suffer the biggest losses, according to the economists. In those cases, rents would decline by 28.4% while the value of the property would, on average, slump by 41.7%, Cologne-based IW estimates.
Chancellor Angela Merkel's CDU has said it will challenge the measures in Germany's constitutional court, although that can only happen once they take effect.
To contact the reporter on this story: Andrew Blackman in Berlin at ablackman@bloomberg.net
To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net, Iain Rogers, Chris Reiter
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