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EXPLAINED: How Berlin rents and property prices soared in 2022

High rents and housing shortages are nothing new in Germany's capital - but a recent report shows the trend is accelerating, with average asking rents going up by almost a euro per square metre last year.

Rental properties in Berlin Prenzlauer Berg
Rental properties in Berlin's Prenzlauer Berg district. Photo: picture alliance/dpa/dpa-Zentralbild | Jens Kalaene

Anyone who’s scoured the recent listings on WG Gesucht or ImmobilienScout24 will be able to see the prices on Berlin’s rental market are higher than they’ve ever been.

It’s not unusual to see 50 square metre flats advertised for a good €1,500 per month these days – and that’s without utilities – making the city’s former rent cap feel like a distant memory. 

The latest housing report from the Investitionsbank Berlin (IBB) translates this anecdotal evidence into facts: in 2022 alone, rents in the capital rose by around 10 percent or just under one euro to €11.54 euros per square metre.

READ ALSO: EXPLAINED: In which German cities are rent prices rising the fastest?

If that seems a little on the cheaper end, it’s because it’s an average taken from all districts of Berlin, from Buch or Marzahn way out in the east to Kreuzberg and Prenzlauer Berg, two of the city’s more central districts.

For apartments in the city centre, asking rents shot up to around €16 per metre on average, while flats outside the Berlin S-Bahn ring came in at €9.71 per square metre. Berlin’s price level is also spreading to areas just outside the city: here, IBB registered average asking rents of €11.12 last year.

One of the reasons for the steep jump in rental costs is the high level demand for living space. After dropping a little during the pandemic, Berlin’s population grew again by 13,384 people in 2022, with far more people arriving from other German states or from abroad than Berliners leaving the capital. And this doesn’t look set to go down, either: the Senate Department for Urban Development, Building and Housing expects Berlin’s population to increase by 5 percent to 3,962,875 people by 2040.

Far too few affordable homes

As part of its study, IBB tracked the availability of homes in three different price brackets: the low price segment (under €7 per square metre), the middle price segment (€7-10) and high (€11 or above). In the most expensive category, housing supply was generally keeping up with demand – with the exception of a few districts such as Reinickendorf and Treptow-Köpenick.

However, when it came to properties in the middle category, all districts had less – or in the cases of districts like Neukölln and Kreuzberg-Friedrichshain, a lot less – housing than needed. In the bottom price segment, all districts had a drastic need for new homes. 

Flats in Berlin's city centre.

Flats in Berlin’s city centre. Photo: picture alliance/dpa/dpa-Zentralbild | Britta Pedersen

This is partly driven by low levels of construction in previous years: in 2021, the number of completed building projects declined for the second year in a row, although construction intensity remained at a high level. In the second year of the pandemic, just 15,870 new homes were completed – 467 fewer than in the previous year.

Potential reasons for this decline include the sharp rise in construction and financing costs, which has made a lot of projects far less financially viable. In addition, high interest rates have been making it trickier for companies to finance their projects in the first place. 

However, with a construction backlog of around 65,000 flats and a realisation rate of approximately 87 percent, IBB expects that a large proportion of these flats will be ready for occupancy in the coming years.

READ ALSO: Germany sees record high rent increases in 2023

Purchase prices continue to rise unabated

With the steep rises in rents, people have increasingly been looking to purchase properties in the German capital, which has also led to price rises in owner-occupied homes.

According to IBB, the asking prices for flats in Berlin have more than doubled since 2012. On average, flats were offered for €5,817 per square metre, with new-build flats significantly higher at €8,409 per square metre. In 2021, Berliners had to spend an average of €698,000 to fulfil their dream of owning their own home. Most of these property purchases were flats, with detached and semi-detached houses only making up a small proportion of the properties sold in Berlin. 

Blocks of flats in Berlin

Blocks of flats in the German capital of Berlin. Photo: picture alliance/dpa | Florian Schuh

“The affordability of housing continues to be one of the most pressing problems for Berlin households,” said IBB chairman Dr. Hinrich Holm. “The discrepancy between increasing demand and the lack of construction activity has recently led to a historic increase in asking rents. Currently, the need for housing is estimated at at least 47,000 flats.”

This was largely to do with insufficient planning and construction, Holm said. “Both rent-controlled and privately financed housing construction and the activation of private developers will continue to be important for this. IBB will continue to support and promote these projects within the framework of our funding programmes in order to provide the broadest possible access to affordable housing.”

READ ALSO: Why does Germany keep missing its house-building targets?

From Berlin to Brandenburg? 

The search for housing within Berlin is becoming increasingly challenging due to housing shortages and rising rents, which is increasingly driving Berliners – and especially young families – out to the countryside.

The destinations for migration are Berlin’s surrounding areas, but increasingly also the second-tier cities and the wider communities of Brandenburg.

These migratory movements are also increasing the volume of commuters living in Brandenburg, which has an impact on the volume of traffic and the housing market situation in the Brandenburg municipalities. The median asking rents have risen in all regions, although Berlin’s inner city is by far the priciest place to live. Somewhat strangely, the asking rents in the surrounding areas just outside Berlin have exceeded those in the outer districts of Berlin since 2019.

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PROPERTY

Should you think about purchasing a buy-to-let property in Germany?

Buying property in Germany specifically to rent out has increased in popularity over the last few years - even as overall home ownership remains low relative to the rest of Europe. So who should consider it here in Germany? We spoke to an expert.

Should you think about purchasing a buy-to-let property in Germany?

Buy-to-let properties in Germany come with many of the same pitfalls as buying a German property to live in yourself. For one, fees and taxes of around ten percent of the purchase price could dissuade plenty a buyer.

But according to Nick Mulder, CEO of Hypofriend, a mortgage broker specifically targeted to expats – there are four broad types of people who might want to have a look at the option.

They include people who might have cheaper rents in the city but simply cannot afford to buy the forever home they might want. As such, they may consider buying a small one – or one in a cheaper city – that they can rent out and use to supplement their income.

Other groups include people who intend to stay in Germany for at least ten years, people with incomes high enough to write off property depreciation against their taxes, and people looking to supplement their pensions with rental income.

EXPLAINED: What you need to know about buying property in Germany

What are the pros if I fall into one or more of these groups?

Mulder says one of the most important things for a buy-to-let purchase of a property in Germany is to be sure that you will hold it for at least 10 years.

That’s because once the 10-year clock runs out, you can sell it and pay no capital gains tax on it – even if the property isn’t your residence. In Germany, selling your main residence at no capital gain is possible after two years – but that option opens up with any property based in Germany you own after 10 years.

If it works, you can effectively claw back the high upfront fees and then some after ten years.

“This is unique globally,” says Mulder. “It can be very advantageous.”

That’s not the only advantage Germany seems to have over other countries. Another is the favourable financing terms. German mortgages tend to have the same terms and conditions for buy-to-let properties as they do for ones you buy as your own residence.

“This is uncommon in many countries,” says Mulder. Interest expense can also often be written off against taxes if you own a buy-to-let in Germany – something not available for people to do on their own residences.

The tax advantages can also be considerable, with recent tax changes meaning that some people will be able to deduct up to 40 percent of their German property’s value from their taxes in the first four to six years of owning it. Owners can deduct everything from the depreciation of the building’s value (but not the land) to energy-efficient retrofits.

In many cases, Mulder says the gains are still generally there for the taking if you move abroad in the meantime – provided the country of your new tax residence has a tax treaty with Germany. You just need to hold the German property for long enough to realise the tax advantages – to help offset the high upfront costs.

READ ALSO: Is it a good time to buy a home in Germany?

What are the cons?

Obviously, if you purchase a buy-to-let in Germany – you need to stay locked in for a while to make the high upfront fees – which include everything from land transfer tax to notary fees – worth it. House flipping after a few years doesn’t work here the same way as it might elsewhere – even for your own residence.

Maintenance can be an ongoing cost, which is why Mulder says they recommend that expat buyers buy up new buildings if possible.

Finally, with strong tenancy laws in Germany, rent is only likely to appreciate by two to three percent a year. This means the upside is largely taken when you eventually sell – not from rental income.

All that said, buy-to-let properties may make sense in Germany for certain types of medium to longer-term buyers – who can stick it out for a few years.

READ ALSO: What fees do you have to pay when buying a home in Germany?

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