Thursday 7 March 2013

The Berlin Bubble

porperty, berlin, price increase, bubble

When I arrived to Berlin, which is over five years ago now, I was seriously thinking about buying an apartment even though I did not personally have the financial means for doing so, but maybe some nice family member could have borrowed me some money.
Either way in the area where I currently live I would then have been able to buy a 50 m2 apartment for around 50.000 €.

This was a ridiculously low price for an apartment in the capital of the financially biggest country in Europe. 1.000 € per m2! If you go to a very nice area in Paris you have to pay 20.000 € per m2. Berlin was silly in one direction and Paris is silly in the other. Today I even read about that prices in London can be up to 35.000 € per m2. Crazy!
Today if I want to buy a 50 m2 apartment in my area I am forced to pay around 100.000 € so in five years the prices has doubled.

Why has the price doubled in this period? Does it make sense? Is it a bubble?

The reason why we have received a property bubble, and I really do consider it to be a bubble, in Berlin is two fold in my opinion:

1. The financial crisis have made rich people in the especially the south of Europe "hide" their money not only in what they consider to be a safe investment (property) but also in what they consider to be a safe country (Germany) which will stay not only in EU but also with the euro. The fact that they are able to get three apartments in Berlin for the price of one in their home country does not make them look any less excited on their investment. Also... the rich Germans that were hiding money (Switzerland as example) has been forced to bring that back and then also need to do something with it.
2. It is too cheap to borrow money today and you can borrow it with an interest rate at around 2 to 2.5% for property. This means of course that you can today get a higher yield by borrowing money to buy property and to rent it out then what you would do buy using your capital. So people borrow, buy property  and rent it out.

To me it is very clear that the prices has doubled and it also makes sense based on if you are looking at the facts in front of you. However... any property prices increasing 100% in five years is just plain and simply a bubble.

What the Berlin property speculators, in my opinion, are failing to understand is that there is no employment in Berlin. This city that never sleeps are filled with: Students, unemployed and retired people. There are since the swap from Bonn to Berlin become a bigger governmental machinery here but that's about it!

Berlin has since the fall of the wall been receiving money each year from the other regions. In, to my knowledge, almost every other country in the world the capital and the income from the capital city is supporting large part of the rest of the country. In Berlin it is the opposite. The rest of the regions and especially the western regions have been forced to push money into Berlin to keep it on some kind of artificial life support. What happens when the regions say that enough is enough?

Bayer Pharma AG (most part of it coming from Schering) is even leaving Berlin for greener grass elsewhere. We have since some years started to receive a lot of internet start-ups in Berlin. Small companies with a potential to grow to an acceptable size... if things work out... however they started coming here because it was cheap to rent office and because the city was creative... that possibility starts to disappear with the property bubble since the offices are not so cheap any longer and soon the vagabond artists will move to cheaper grass similarly to what Bayer Pharma AG did.

No jobs equalises no chance to support higher prices. Since there is no salary increases in Berlin how will people be able to pay the prices asked?  What will be left in Berlin? Well, that one is easy. The things that were here before. The students, the unemployed and the retired people. Oh, and a lot of property investors with big losses and then, even I, will buy an apartment from one of them.


Anonymous said...

50000 euros for 50m2 then and 5 years later 100000 euros. That equates to 2,000 euro/m2!! And you think berlin is having a property bubble?? Didnt you just say in london 5 years ago some property would sell for 35,000/m2. Now thats a property bubble! Im sorry but berlin has a long way to go yet.

Fredrik von Oberhausen said...

No, no, in London the price mentioned was current and not five years ago. It is indeed still very cheap in Berlin which is why the investors are still buying property here. However people already back then paid 40-50% of their income to their rent. Now with the investors and the price increase it starts to be even higher of their income. I think that what can save and expand the property bubble in Berlin is if they really go through with minimum salary. So yes it may go on much longer, bubbles always go much longer then what one would think or hope and there are political reasons that will expand it further.

Still 100% increase in 5 years i too much. Property should generate 3-5%. Why should it be more?

Unknown said...

Berlin is a place full of attractive places where people can reside but firstly we have to check the trusted real estate agents because now-a-days there are huge no. of real agents those who helps to buy and sell property, apartments. Apart from of the all real estate agents some of are fake agents. We have to check whole market criteria before going to buy property in Berlin.

Fredrik von Oberhausen said...

Yes, there is a lot of problems as in every bubble where people expect to get rich quick.

I just hope that it will soon go from a sellers market to the buyers market.