Where are things in Berlin's real estate cycle?

Spring is the time for appraisals

Various institutes and banks are currently publishing reports on the state of national and regional housing markets. Some reports, including those from Deutsche Bank and the Federal Institute for Research on Building, Urban Affairs and Spatial Development, believe that the real estate boom will come to an end in the course of this year. Is the real estate market in Berlin facing a downturn? We have taken a look at some of the indicators.

Deutsche Bank Research: End of cycle and price corrections are approaching

The outlook for the German housing market in 2022, based on data from bulwiengesa and Deutsche Bank Research, does not discuss whether the ongoing house price cycle will end, but only when. The study approaches an answer via the historical price development and the comparison of national and international house and apartment prices as well as supply shortages, inflation and interest rate development. The influence of a stricter climate policy is also considered. Based on these aspects, the study attempts to identify price paths within the decade to 2030.

Historical price comparison

Based on bulwiengesa data, Deutsche Bank Research (DBR) accounts for an increase in aggregate apartment and house price indices in 126 German cities of around 6 to 7 percent compared with 2020, with a simultaneous slowdown in rental price growth. The growing disparity between purchase prices and rents is having an impact on initial yields, which, according to the study, have fallen to 3.7 percent in the existing stock and 3.1 percent in new construction nationwide. DBR, meanwhile, notes a high degree of price divergence between the bulwiengesa data and other price indices, probably due to different calculation methods, e.g. based on supply and transaction data as well as expert assessments, as is the case for bulwiengesa. Even taking these divergences into account, almost all established indices show a divergence between purchase prices and rents. The Guthmann asking price index, which is calculated on a rolling basis over 1, 3, 5 and 10 years, also confirms the slowdown in the development of purchase prices in the existing stock segment for Berlin, although the trend varies greatly from district to district. The frontrunner here is Mitte, with an increase of almost 30 percent, and at the other end of the scale Tiergarten, with a drop of around 10 percent on the previous year.

Supply rents have never seen such sharp swings as in the period since mid-2020. The supply of rents collapsed in the wake of the rent cap and has not recovered to this day. As the pandemic has unfolded, supply has thinned further due to a sharp reduction in attrition. Whether the supply of unattached housing will recover is at least questionable, also in view of new political approaches, such as most recently the idea of a special tax on high rents.

Berlin in international comparison

In the Numbeo price database, where information on income, cost of living and real estate prices is maintained, Berlin ranks 11th in Europe in terms of price-to-income ratio, with a value of 10.5 on a scale of 5 to 25. Berlin's value is in the range of Amsterdam, Talinn and Stuttgart. Affordability is an index that relates local income to housing price. The index is not indicative of how attractive a property in Berlin is from the perspective of a foreign buyer. The gross rental yield can be used for this consideration. In a comparison of European cities, Berlin ranks 28th out of 101 with an assumed gross yield of 3.28 percent, although this table must be read backwards. By comparison, the yield in Cork (Ireland) is 8.51% and in Paris 2.47%. This shows that residential property in Berlin is moderately valued internationally, despite price increases that have been constant for almost 15 years.

But has Berlin reached the limit of potential catch-up effects?

In fact, the German capital went from being an insider's tip to a highly developed real estate location within 15 years. For a long time, the low purchase prices for Berlin real estate were fueled by maintenance congestion, undeveloped locations and a high vacancy rate. For many foreign buyers, a real estate purchase in Berlin was attractive because purchase prices, expected returns and development opportunities were above the level of other markets. At the same time, some European real estate markets found themselves within crisis. The investment risk in Berlin, on the other hand, was negligible. With growing influx and rising demand, vacancies were eliminated, portfolios refurbished and hip locations established. The elimination of price-distinctive features turned the emerging market of Berlin into a still very interesting but largely established real estate market. Indications of the waning interest of international buyer groups in the Berlin real estate market can also be seen in the transaction figures on a longer time series.

Berlin's emerging real estate market has become a developed residential market that still tends to be favorable by international standards with largely completed catch-up effects.

Is the influx strong enough for further price developments?

For years, it was considered a foregone conclusion that the continuing influx into Berlin would sustain price growth indefinitely. The impact of the Corona restrictions largely halted the influx in 2020, although it had already lost some steam before the pandemic began. In 2017, the balance was about 31,000, and in 2018 and 2019, about 24,000 inflows each year. The actual population of Berlin is unclear and ranges between just under 3.7 and 3.85 million inhabitants. In the middle variant of the projected development, the Berlin Senate assumes about 3.925 million inhabitants in 2030. In the ongoing 2022, the census, which was postponed due to Corona, will be caught up; it is expected that the results, which will be available next year earliest, will provide more precise information on the actual population and housing situation in Berlin. Directly related to the number of inhabitants, inflows, demographics, vacancy rates and household sizes, the question arises as to how large the housing deficit in Berlin currently is in the first place and what demand for owner-occupied housing can be derived. The 2018 microcensus statistically surveyed around 1.446 million apartments in Berlin that were rented out by the owner for residential purposes. 305,000 apartments were occupied by the owner himself. (Source: Office of Statistics). Another finding of the microcensus is the increase in the owner occupancy rate, which was last reported (2018) at 17.4 percent. If this rate is set to the deficit estimated between 80,000 (IHK) and 200,000 (Stadtentwicklungsplan Wohnen) units by 2030, this results in a calculated need of 14,000 to about 35,000 apartments in the segment of owner-occupied condominiums. The policy new construction target from the Senate is 20,000 units per year, with new construction activity recently declining to about 16,300 units.  

Inmigration has been declining even without Corona. Overall, new construction activity is reducing pressure on the rental market in Berlin in the medium and long term. The growing ownership rate provides a stable and high plateau for portfolio sales and new construction projects. 

How is regulation affecting further development?

For a long time, regulation of the housing market was a key issue in Berlin. The change in the state government and in urban development, together with the court rulings from Karlsruhe on the rent cap and from Leipzig on preemption practices, have initiated a shift in priorities in favor of new construction. This does not mean that regulation will remain frozen at the current level. Among the possible scenarios are an adjustment of the speculation period, the further capping of rent increase options, a further tightening of the rent brake and the major undertaking of legally binding standardization of the rent index. In Berlin, the latter was last declared inadmissible by the Spandau District Court. It is likely that the rent index will now also have to be decided by higher instances, with an uncertain outcome. As an "interesting alternative" to the rent cap, a "rent tax" of 10 to 30 percent was also recently brought into play by the DIW, very surprisingly, with which all property owners, especially those with high rents, could be moderately expropriated.

Questions of regulation remain relevant, but in the future they will probably be examined less according to ideological than legal criteria.

In our regulation radar, we visualize some scenarios for you based on current interviews and statements from local and federal politicians.

Marketing duration

One possible indication of changes in the real estate cycle is how long it takes for a property to find a buyer. In addition to the correlation between purchase price and marketing duration, the level of interest rates on loans, the inflation rate and the yield also play a role.

In the following chart, we measure the time from which a property is offered in Berlin and the time from which it disappears from the market, which for us marks the end of marketing. During the lockdownn in March 2020, we saw a collapse in supply and a sharp shortening of the offer period, which can be explained by the fact that many properties were taken off the market for a marketing pause and remaining properties were sold quickly. Overall, there are no indications that the marketing period for properties in Berlin is increasing. In the segment above 7,500 euros/m², the trend is more towards a reduction in the marketing period. One assumption is that the short supply is currently still overriding the combination of rising prices and interest rates.

Future market segments

The tight supply of real estate in Berlin is one of the driving forces behind price developments. This is now being compounded by other factors, such as rising interest rates and inflation, sharply rising construction costs and, in addition to generally uncertain geopolitical sentiment, declining immigration rates. On the other hand, social modernization is in progress. For the real estate industry, social change, which is characterized by a transformation of lifestyles, values and interests, means greater consideration of residential location criteria. In the existing housing stock, this will tend to translate into greater differentiation of attainable prices by location. In new construction, there will be demand for different types of housing and submarkets, but above all for different products, depending on household type, age and social milieu. This means that the focus in this segment will be on the targeted and intelligent configuration of products according to the actual needs of the target group.

Where does the Berlin real estate cycle stand?

15 years of price increases on the Berlin real estate market are causally attributed to the fundamental supply shortage, triggered by a fulminant Berlin boom that started towards the end of the first decade of the new millennium. However, population growth is not the reason for Berlin's success story, but rather the consequence of it. The city's capacity for constant transformation and expansion of its own cultural identity have made Berlin one of the most refreshing metropolises in Europe. The high-performance research and science landscape and a large start-up scene prove that Berlin has outgrown the "poor but sexy" phase long ago. Berlin is on its way to becoming sustainable, economically successful and future-oriented. Viewed from this perspective, the cycle in Berlin cannot come to an end at all. 

What does this mean for the development of purchase prices and rents? The factors mentioned above will help here. Berlin's attractiveness persists despite a slowdown in immigration. The shortage remains for the time being, but may soon no longer be fundamental. And regulatory measures often have a delayed but also lasting effect rather than an immediate one, which can be seen in some milieu protection areas.

Conclusion: an advanced stage of maturity in the real estate cycle does not seem to be a bad description for the real estate market in 2022 in Berlin. Without explosive price or rent developments, with accompanying consolidation in overpriced locations and hedonic rather than demand-driven price developments.