#Lukáš Kovanda, Ph. D.

Berlin’s Bohemian Tragedy

24 September 2019

During the last hundred years, hardly any metropolis of the world has undergone such a transformation as Berlin. The former Prussian army headquarters has become the city of bohemians and hipsters. At the same time, it still bears the scars from the Second World War bombings and the Cold War division. This is not all. After the German reunification, Berlin fell into debt and has remained a burden for the whole German economy, which is a rare exception amongst European capitals that positively contribute to their country’s GDP.

The problem of Berlin today is a chronic shortage in the construction of adequate new housing. The city lacks more than 300,000 affordable apartments, as shown in last year’s Hans Böckler Foundation study. No other major German city is so desperately lacking suitable housing quite like Berlin. To understand why, we need to step back shortly in time again.

Ghosts of the past have haunted the German capital. After the fall of the Iron Curtain and the Berlin Wall, the city has remained in economic ruins. The former socialist “capital” of the ‘Soviet-bloc countries’ collapsed, of which East Berlin became the ‘poor living ‘ part of the city. To make matters worse, companies from former West Germany have not moved to Berlin unlike the Chancellery. Their headquarters have remained in Munich, Frankfurt, Stuttgart, or Hamburg. So at least at the beginning of the millennium for its marketing motto Berlin could deservedly choose to be “poor but sexy”. The economic misery of the indebted city has attracted people with a similar fate. Bohemians came, much like artists, anarchists and in today’s words ‘hipsters.’ The local left-leaning community gave the city a much needed boost.

Around 2010, Berlin’s bohemians, artists and hipsters were caught up by a debt which was not the liability of the German capital itself, but was accumulated thousands of miles to the south, in Greece. By law, German cities have the benefit that they cannot go bankrupt. Unlike Berlin, Greece could go bankrupt, because of the decades of budget deficits. In response to the Greek debt crisis, which broke out in 2010, the European Central Bank began printing billions of rescue euros that were supposed to cover the Greek debt. In doing so, the European single currency depreciated and its interest rates depressed, including rates on loans and mortgages.

Greece was ultimately saved. Athens is now borrowing as cheaply as it did before the crisis, around 2006. It was the hipsters in Berlin who indirectly paid for the Greek debt rescue. Low interest rates and a weak euro lured investors from around the world, including the likes of Warren Buffett to Berlin as easy prey. They understood that a city that had such a housing shortage was a perfect place for investing in existing real estate. Especially at a time when the European Central Bank was eager to save Greece (and other so called PIIGS countries), massively devaluing the euro, making loans and mortgages attractive and therefore making foreign investments in Berlin real estate more attractive than ever before.

Unlike the foreign investors, Berlin’s hipsters and bohemians were not aware of the real goings-on. For example, in a 2014 city referendum result, the Berlin municipality decided not to build new apartments on the former Tempelhof airport land. Their decision was contrary, to the build up of the referendum, where the same office-bearers assured the hipsters in building new apartments, including affordable housing on just a quarter of Tempelhof land. This promise meant that the remaining 230 hectares would still be able to hold their barbecue parties. Alas, this was not meant to be and today, the area boasts a meadow, a park and a leisure zone that is a third larger than that of Monaco.

The greatest real estate investment opportunity in Berlin for Mr Buffet and the other foreign investors came at the expense of the bohemian stubbornness. This is the reason why the Berliners are now marching in the streets. Naturally, the shortage of available housing and high demand has therefore there increased a wealth of existing property owners, and thus creating a bigger gap of inequality within the city.

A concentration on property development and new affordable apartments which has been lacking in Berlin for such a long time is by far the best remedy for their housing shortage and, related, increasing social tensions.

Lukáš Kovanda

Lukáš Kovanda, Ph.D., je český ekonom a autor ekonomické literatury. Působí jako hlavní ekonom CZECH FUND. Analyzuje a komentuje makroekonomická témata, investice i nové fenomény typu sdílené ekonomiky, kryptoměn či fintechu. Přednáší na Národohospodářské fakultě Vysoké školy ekonomické v Praze.
Je členem vědeckého grémia České bankovní asociace.

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