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Why are rents in Germany shooting through the roof? We found out

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Jörg Luyken - [email protected]
Why are rents in Germany shooting through the roof? We found out
Renovation work on a Berlin apartment. Photo: DPA

Anyone who lives in one of Germany’s larger cities will be aware that rents have been rising sharply in recent years. But what is causing this surge and what can be done? We talked to one of the country’s leading specialists on the rental market to get some answers.

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From the point of view of the German tenant at least, the strength of the German economy can feel like something of a poisoned chalice.

As countries in the south of Europe struggled to tackle high unemployment after the 2008 financial crisis, droves of Spaniards, Italians and Greeks decided to up sticks and start anew in Germany.

Add to that east Europeans who were suddenly able to migrate to western Europe and hundreds of thousands of refugees, and you have a lot of pressure put on the German rental market, says Reiner Braun, who leads research on the real estate market at consultancy firm Empirica.

“More people has meant more demand for apartments,” he says.

But it isn’t just migration from abroad that is creating a bottleneck in the German rental market.

“People are leaving rural areas and moving into the cities. That’s something that we’ve seen in China, Africa and America, but which didn't affect Germany in the past. Now there is a huge movement of people under 35 into the cities. This factor alone would have caused a strong rental rise.”

Government caught off guard

According to Braun, German authorities have been caught flat footed by this surge of people towards the bright lights of Berlin, Hamburg and Munich, but also to smaller so-called “swarm cities.”

“A decade ago everyone in Germany thought that the country’s population was going to shrink, that demand on the rental market would shrink and that the amount of empty apartments would go up. So both government and investors ignored signals from the market that suggested otherwise for a long time,” he says.

Even when real estate investors realized that something was up though, they couldn’t just start building.

Local governments had been cutting personnel to save money, Braun says. “And when they made the cuts they did it where they needed people least, in the building authority.”

In other words, the specialists who had to survey the land and assign it for building were no longer there. And finding new ones isn’t necessarily easy when the private sector can offer engineers much better salaries.

SEE ALSO: 'In Berlin’s housing market people are getting mad, getting scared'

People power

It isn’t just local government that has thrown a roadblock in front of much needed development though, Braun says.

Citizen protests have regularly hindered the creation of new building developments.

“There is the totally normal reason: people have a ‘not in my backyard’ mentality,” he explains.

“But the fear of gentrification is another [reason]. People equate new builds with rent rises. That seems true because new builds are more expensive and so people fear that in neighbouring buildings the rents will also go up. In fact, the rents go up when there isn’t enough supply and would have risen without the new builds next door to them.”

Demonstrators occupy a house in Berlin. Photo: DPA

One recent example of citizens’ action on apparent injustices in the rental market is met by particular scorn from Braun.

In May activists occupied several buildings in Berlin to highlight what they claimed was a high number of properties which are bought by speculators and then left empty for years before being sold at a profit.

“That is complete rubbish,” says Braun. “There are no houses lying empty due to speculation. It is a crazy left-wing idea that the lack of available housing has something to do with speculation.”

While the capital did have around 100,000 empty apartments two decades ago, that number has dwindled to almost nothing now, he says.

“Our research shows that there around 18,000 empty flats now - or around 1 percent of the total stock. But this can be explained by the fact that there needs to be a few empty flats so that people can move house. There always has to be apartments which need to be renovated which can also take some time,” Braun points out.

Where the rents aren’t rising

Another issue which is often ignored in reporting on Germany’s rental rises is that the majority of the population isn’t affected.

Braun estimates that two thirds of the German population has not felt the effects of the rental increases. Those who live in rural areas may have even benefited from lowering rents as the flight of the young to the cities has created an excess of supply.

READ ALSO: Germany's controversial rent control law works after all (at least in central Berlin)

Even in the cities though, rents aren’t rising everywhere. Germany’s strong pro-tenant laws protect long-term tenants from rent rises.

“Legally, the rent can only be raised by between 15 percent and 20 percent within three years. And one isn't allowed to put up the rent [on an old contract] higher than the rent index, which is assessed every four years,” says Braun. “The ones who suffer most are mobile young people who need to move home.”

Fixing the problem

Making the countryside a more attractive place to live is part of the cure, Braun says.

“Germany’s rural areas are unattractive for two reasons,” he explains. “Firstly, there is poor mobile phone and broadband coverage. Secondly, you are stuck if you don’t have a car since most public transport there has been discontinued.”

“A common misconception though is that are too few jobs in rural areas. That’s not true. We’ve found that there are more job openings per capita in the countryside than in cities like Hamburg, Munich and Berlin.”

The difference though is that the highly-qualified jobs are mainly in the cities. And not only are ever more young Germans going to university, they are marrying other highly qualified professionals.

“In the old days, the doctor married the nurse. Now he marries the head doctor - and that makes it hard for them both to find jobs that fit their qualifications in the countryside,” says Braun.

A new build in Berlin. Photo: DPA

Secondly, he says, politicians need to make it easier for investors to build.

In Berlin, where the housing deficit is among the accutest in the country, years-old plans to build large new settlements at the edge of the city have never left the drawing board.

Braun blames this on Die Linke, the far-left party that are a powerful force in Berlin politics.

“Die Linke have a problem with migration to the city. They say that if we build more, more people will come here. That is wrong-headed. People will come anyway, and the incomers are generally better paid and put pressure on those already here.”

He also laments poor policy making at the federal level.

The German government aim to ignite a building boom by subsidizing the construction of new housing via tax benefits.

“But subsidies only make sense if investors don’t want to build,” says Braun. “Low interest rates mean that investors are really keen on building.”

“The building isn’t happening because the state hasn’t set aside land to build on. Subsidies, by creating more demand, drive up the cost of the land and thus the building costs. So this is completely wrong policy.”

Nonetheless, there is some sign that supply is finally starting to catch up with demand. Whereas five years ago around 5,000 newly-built apartments were coming onto the market in Berlin, that number has now risen to 16,000 a year. That is still well below the estimated 25,000 that Emperica has found to be necessary.

“I don’t think we are going to manage that any time soon. Political resistance is still very high. The price rises might well calm down a bit, but the lack of apartments will last for another four or five years,” Braun predicts.

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