Berlin Lab

“So . . . Why Is Rent So Cheap Here Anyway?” Part 2: Why It Doesn’t Matter

Berlin Wall Memorial

In my last post I sat down with economic historian Dr. Nikolaus Wolf for a crash course in how Berlin’s economy has remained so much weaker than that of comparable Western and European capital/large cities until now. And until now, of course, that economic anomaly has been mirrored by abnormally low housing prices.

With that in mind, it would be easy to imagine that the sudden leaps in rent that Berlin is currently experiencing are simply the direct result of a finally recovering economy.

To a certain extent, this is true. But it’s not quite the whole story.

“I think everybody in Berlin feels that Berlin is now at the point where some of the hopes that people had in 1989 are materializing, that the economy is finally really moving ahead,” Wolf told me. But this surge is not taking place because of a return of businesses and industries that left the city during the Cold War, as people had originally expected and hoped. No. “This is because totally new enterprises and new sorts of business are really taking off,” said Wolf.

One of these, of course, is tourism, which is fueled partially by Berlin’s unique history and partially by the city’s explosive arts and culture scene, among many other factors. Tourism has always existed in Berlin, but not nearly to the extent seen in, say, Paris or London. That is now starting to change. In 2011 the city saw 8 percent more visitors than in 2010, which was one more step on a continuous upwards swing.

But there is also a sudden boom in brand new types of employment—from biotechnology, to tech tech, to new media—which has landed Berlin in one of the top spots on the European Innovation Index.

As Kurt Geppert of the German Institute for Economic Research (DIW) put it in an interview with the Economist: “Faster than any other large city in the world, Berlin needed to develop a new economic profile—and it is happening.”

“All these types of businesses where you need a very well-educated and creative workforce, this is where Berlin is really improving now. It’s clearly not a story of any type of relocation of business from West Germany to Berlin; it’s really something new that’s growing,” said Wolf.

“I would really say in a sense it’s a normalization. Berlin still is behind the German average, but it’s actually improving; it’s really moving up the ladder.”

So that’s one factor.

But then there’s the other.

“Now, of course, we have yet a totally different movement that is coming out of the financial/euro crisis situation that there’s a lot of capital desperately trying to find interesting long-run locations . . . so there is a special movement of capital into Germany. And within Germany, Berlin looks like a particularly interesting place,” Wolf said.

“This capital is pouring into the real estate sector.”

Because Berlin’s real estate prices have remained so abnormally low for so abnormally long, he said, the perception is that Berlin has more upwards potential than other places.

“Because it was—for not just the last 20 years but actually longer—in a deep hole, even if things were generally moving downwards they wouldn’t move so badly downwards in Berlin. This is an extra factor that is giving dynamics to the situation in Berlin, I think.”

(It’s worth noting that any economist will tell you that this is an incredibly difficult phenomenon to stick data points on. However, support for the educated opinion is easily illustrated by the number of advertisements for development in Berlin that blatantly take advantage of the situation. Take OPC Investments’ description of Berlin as “Europe’s most dynamic property hotspot,” for example: “Berlin is buzzing. . . . Tourism is booming and creative people from all over the world flocking to live there. . . . But due to unique historical circumstances, property in the new capital currently lies at rock-bottom prices. . . . This is your second chance to get in at the start of another property boom!”)

I should add that Wolf underscores the importance of keeping this surge in investment in perspective. If you were to compare it to what has slowly and steadily happened in other comparable cities over the last several decades, it is, as he put it, “really not anything spectacular.”

“There’s extra capital moving into the city, investment from abroad, and this is maybe also creating sometimes some negative perception because people think, ‘oh, this is odd that all these foreign investors are coming into the city now,’ but if you compare it to London or Paris, I’m sure that the percentage of foreign investment is not particularly high in Berlin. It’s just that it wasn’t there as much before because of a very strange economic history of the city in the last 70 years,” he said.

Moreover, he reminded me several times throughout our conversation that the reason it’s happening now is because “Berlin is far below the point where it should be.” If you compare Berlin’s housing prices to those in Warsaw, for instance, they are in many cases lower in Berlin.

“If you put that into the context of comparing the German economy to the Polish economy, that can’t be the long-run equilibrium, so to speak, as an economist. You realize that the level of rents is really not sustainable,” he said.

However, because the boom in the economy and the boom in the housing market are not entirely connected, it is essentially hitting people harder than a slow, normal process of inflation would.

“You have an improvement in the economic situation; unemployment is going down, but this is not the main reason why property prices are going up. And that actually means that yes, for many people who live in Berlin, the situation actually becomes tougher,” said Wolf.

In the past, he said, many people—from artists and musicians, to new families—came to Berlin because even though the salaries were less on average, the housing and other costs were so much lower than in other German cities that it actually more than made up for the difference.

Today, he said, “this kind of advantage is getting smaller.”

So yes, maybe Berlin’s housing market, like its economy, is finally beginning to reach a “normalization.” But the way and why it is happening go a long way to help explain why it is perhaps hitting some so hard.

Photo: Cobblestones marking the former site of the Berlin Wall, 2007, .Hessam via Flickr. 

  • ber

    I would like to add that due to decisions during the German reunion (“Rückgabe vor Entschädigung”) lots of properties in East-Berlin were up for grabs and they were cheap. In the years following, investments in East-German properties and their renovations were subsidised with big tax breaks.

    One may already see a pattern here which industry/class is favoured most. And when you look at the decisions of the Berlin Senat … no further questions.

    I don’t have a statistic at hand – but it would be good to take a look at
    the income-rent ratios in German cities rather than just the prices. There is still a significant income gap between East (incl. Berlin) and West Germany.

    Apart from that I think telling people it’s much worse somewhere else is not a solution and could easily be misunderstood as “shut up – be happy”. To tackle the power of the property market it is neccessary to act as quickly as possible.

  • Annoyed

    “Normalization”, you should question this word first: is it normal that 50% of world population live below poverty line? It is but should this happen also in Berlin, because this would be normal? How many people can afford to live in decent circumstances in Paris, London, Moscow or even Warsaw? In Berlin you can, and this nice “historically exceptional” circumstance should be normality instead of rent-sucking real estate managers getting more and more money – besides probably BMW and Guggenheim help this unfortunate “normalization”, the first as symbol of gentrification and the latter as motor of gentrification. 

    • http://twitter.com/csgmclaren Christine McLaren

      Perhaps there’s a bit of misunderstanding – what this article is pointing out is that it is a big problem how, in Berlin the rises in its real estate prices are not necessarily inextricably linked with or mirrored by a growth in the wealth of its citizens.

      If prices had risen steadily while incomes grew at the same time, affordability would not be such a big problem, because incomes and rents would be more balanced with each other. But because rents are rising for external reasons, there is a growing gap between what residents can afford, and what is being offered.

      And this is a big, big problem. I don’t think anyone is saying that people should be living below the poverty line or in poor conditions. In fact, quite the opposite; I’m not sure where you would have gotten that from, but certainly not from anything I’ve written. This article was really meant for background to understand why things are the way they are right now in Berlin. 
      I think the situation in London or Paris, where one can hardly afford to live in any decent condition, is what we are trying to avoid, no? 

  • Samiksha Srivastava

    Whether you are a landlord or prospective tenant we would be delighted to hear from you. Please feel free to visit our offices in either Airdrie or Hamilton where we would be happy to welcome you, chat through your requirements and help you find your letting solution.www.letsbylocation.com