The Market Works Fine – even in Berlin.

It is not as easy as it used to be to find a flat in Berlin, at least not if you are looking in the more coveted parts of town. While flathunting is still nowhere near as difficult as in Munich, Frankfurt, or Hamburg, the times when landlords bent over backwards to attract tenants are definitely over – unless the apartments you are trying to let are located in Marzahn.

The tenant union and the lobbies of contractors and developers have already started clamouring for subsidies and tax breaks in order to stimulate housing construction. At the same time, tenant interest groups and leftist politicians are calling for rent ceilings.

Which is interesting, because the development demonstrates precisely that the market works beautifully, including in Berlin. It is exactly the rise in rent rates that makes housing construction a more lucrative proposition, even if not in every price segment. At 5,631, the number of building permits issued in Berlin during the first three quarters of 2011 already exceeds the volume of the entire year 2010 (5,470). Even the segment of apartment blocks, where construction had virtually ceased for the longest time, has picked up steam again. In fact, the number of building permits issued in this segment during the first three quarters of 2011 doubled year on year.

To be sure, this still falls short of the mark when you consider that the number of households rose at an annual average of 15,000 in recent years. Yet this is due to the fact that construction does not begin to be profitable unless you have a chance to realise a squaremetre rent of approximately nine Euros. Unsurprisingly, therefore, current construction projects are clustered in Mitte, Prenzlauer Berg, Steglitz-Zehlendorf, Charlottenburg-Wilmersdorf, and Friedrichshain-Kreuzberg. Assuming that rent rates will keep pushing up, building homes will soon be worthwhile in other boroughs, too.

These tidings will afford as little solace to tenants now looking for a flat in a low-priced rental segment as do plans tabled by the city’s Senate to raise 30,000 new apartments in the years to come. Accordingly, tenants are increasingly shifting their searches to those districts where rents remain low and vacancies high. In Marzahn-Hellersdorf, where the vacancy rate exceeds that of any other borough, you can still hire an apartment for a net rent of less than 4 Euros. The latest figures suggest, though, that even here rents are perking up, if only at a modest rate of two percent, lagging far behind the rental growth seen in popular districts. Spandau is another borough where affordable apartments coincide with a comparatively high vacancy rate, and where rents have lately surged by five percent. Flat-hunters are turning their attention to boroughs with favourable rent levels.

In short, rent rates are rising, and so is the number of housing developments (even if they fall short of demand), prompting tenants to move on to boroughs where rent rates remain low. That the interest groups of the construction industry and developers are calling for new subsidies and tax relief is made plausible by their vested interests: They earn their keep by building or selling real estate. This does not mean, though, that subsidies are truly needed, least of all in Berlin. While the market mechanisms are admittedly slow to respond, the market works fine without subsidies and tax breaks – even and especially in the nation’s capital.