The legislation follows huge pressure from residents angry that rent hikes are making the city – where 85 per cent of people rent their homes – unaffordable.
The city’s housing senator Katrin Lompscher said the rent cap, planned to take formal effect in January next year, would be backdated to 18 June to prevent landlords rushing to raise rents before the proposal becomes law.
“With the new law we want to put a stop to the serious rent increase in recent years and calm the overheated rental market,” said Ms Lompscher.
Artists and students were drawn to cheap housing in Berlin after German unification in 1990, but rents in the fashionable city have more than doubled since 2008, according to a study by online housing portal immowelt.de.
Despite a huge influx of people from across Europe in recent years, campaigners have been keen to keep Berlin rents more affordable than in London, Paris or New York City.
A two-bedroom apartment in the trendy Prenzlauer Berg neighbourhood currently costs about 1,500 euros (£1,341) a month – far less than equivalent-sized flat in desirable London neighbourhoods such as Stoke Newington or Primrose Hill.
Activists worried about gentrification recently launched a campaign to get the state government to seize control of nearly 250,000 private apartments in the city rented out by corporate owners.
Shares in some of the private property companies with large portfolios in Berlin fell after Tuesday’s announcement of the five-year rent control measure. Grand City Properties was trading some 0.8 per cent lower and Deutsche Wohnen fell by 1.25 per cent.
Speaking to investors in Frankfurt on Tuesday, Deutsche Wohnen chief Michael Zahn dismissed as “populism” the campaign by activists for state expropriation of his company’s properties.
Last week chancellor Angela Merkel met some of the tenants campaigning against rising rents in a country where home ownership is traditionally low.
Merkel spoke at a meeting in Cologne of the German Tenants Association. Its head, Franz-Georg Rips, warned that members were losing faith in the government’s ability to tackle rent rises.
Thorsten Schaefer-Guembel, acting co-leader of the centre-left Social Democrats, has said his party will discuss nationwide rent controls with Ms Merkel’s coalition Union bloc.
Additional reporting by agencies
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