Why the hell does nobody build more affordable housing in Berlin?!
TL;DR: High construction costs and interest rates create tight margins for new housing in Berlin, making affordable projects barely viable even without profits—minimum rents required often strain affordability, explaining parts of the building slowdown.
Disclaimer 1: Stating the obvious or the most likely outcome is not an endorsement.
Disclaimer 2: This is not investment or tax advice, a recommendation or call for any specific action, or an opinion piece; your mileage may vary.
Disclaimer 3: The math is simplified for the sake of intuition; you can go arbitrarily complex with (mildly) improved precision but the main mechanisms are the same.
Introduction
Recently, I had a conversation with a colleague about the skyrocketing rents in Berlin and why it seems impossible to build more affordable housing. They argued that greed from developers and landlords is one of the main reasons, but I wondered if basic economics—like construction costs and interest rates—might not already explain much of what is seen. To explore this, I did some first-principles, back-of-the-envelope calculations, focusing solely on covering costs without any profit motive. We are assuming no subsidies, no self-use scenarios, no feeding the mortgage (also known as negative gearing), and “cold rents” (excluding utilities like heating, water, etc.). If you do not care for the math, just check the estimations in the results section.
The executive summary boils down to: In today’s high interest rate regime by historical standards (even at low-end rates of 3-4%) combined with median construction costs around €4,470/sqm in Germany, sustainable rents are pushed to levels that strain affordability, making new projects barely viable without losses or at least significant risk thereof. Coincidentally, there was also an article in the Tagesspiegel quite recently that looked at the economics of rents and their findings align with the ones below.
All numbers are based on publicly available data; see references at the end of the post.
Covering Costs vs Actual Investments
This analysis focuses on minimum rents that cover only opportunity costs and basic ownership expenses, without profit margins, expected property appreciation, and risk premiums. It represents a “break-even” scenario, assuming investors aim merely to avoid losses. This is a reasonable minimum requirement as otherwise investors would not invest in the first place and put money elsewhere. As a second-order effect this also holds true for institutional investors in the broader sense (including pension funds, governments, etc.) as they face similar opportunity costs and also these investors need to aquire the funds-to-be-allocated from somewhere (be it money paid into a pension fund, taxes collected, or simply debt) and have to answer their constituents and stakeholders.
In contrast, actual investments typically seek profits, incorporating risk premiums, management fees, and anticipated appreciation. Our model is conservative by underestimating required rents for profit‑driven scenarios—real‑world investments might demand higher rents to be viable. However, it is not conservative in ignoring appreciation; by purposefully excluding it, we avoid overestimating feasibility in times of uncertain growth potential and market conditions, or more broadly in times of risk aversion. Moreover, appreciation only affects rents if the investor or owner is willing to take lower rents than required to cover costs, i.e., negative cashflows in anticipation of future appreciation. We will discuss this point in the next section.
Feeding the Mortgage and Negative Gearing
As mentioned in the introduction, our analysis assumes no “feeding the mortgage” (negative gearing), where rental income is less than expenses, and the owner covers the shortfall. This practice, common worldwide for tax benefits, often allows losses to be deducted against other income. We explicitly exclude it here as we focus on break-even scenarios without self-use, appreciation bets, or subsidies; negative gearing may be understood as functioning akin to an indirect subsidy, realized through the tax system. Nonetheless, for completeness, we will briefly discuss it below so that its effects are clear.
The tax mechanisms for negative gearing are country-specific. In Germany, interest and losses from rental properties can be deducted against other income. For example, if a property costs €5,000/sqm with 4% interest, monthly costs might be €20/sqm, but if rent is only €15/sqm, the owner “feeds” €5/sqm—potentially tax-deductible, encouraging investment despite losses, especially if expecting capital gains.
Example: Rental income €15,000/year, costs €25,000/year, loss €10,000 → taxable income reduced by €10,000, saving ~€4,200 at 42% bracket. The state effectively co-funds the feeding.
The example above is more that of a private investor and institutional investors may have very different and highly complex structures. Moreover, negative gearing in Germany is not as aggressive as in some other countries like Australia. It is also important to note, that negative cashflows come with (substantial) risks, including financial strain if property values do not appreciate as expected, higher interest rates increasing losses, or changes in tax laws reducing benefits. Why do investors do it anyway?
- Capital Gains Play: Accept short-term losses hoping the property’s value will rise enough to offset them.
- Tax Deductions: In some countries, deduct the loss from other income, reducing your tax bill as discussed above.
- Portfolio Growth: Enables buying more expensive properties, compounding returns if prices rise.
However, negative cashflows require investors to take realized losses (“money gone for sure”), so that if conditions are unfavorable it might be hard to convince investors to take the risk; in particular if the investment is leveraged, which exacerbates the loss relative to the equity base.
Key Results
Summarizing the calculations from below, here are the minimum cold rents needed to cover costs (at 3% interest and 25% cost factor as defined below), without profits:
- Median new-build construction: 13.96 €/sqm/month (median construction cost of 4,470 €/sqm)
- Mitte (center) existing: 25.00 €/sqm/month (average purchase price of 8,000 €/sqm)
- Charlottenburg existing: 19.69 €/sqm/month (average purchase price of 6,300 €/sqm)
- Spandau (outer) existing: 10.00 €/sqm/month (average purchase price of 3,200 €/sqm)
Current Berlin rents (12.50-20.00 €/sqm) often imply lower sqm prices than actual costs, suggesting unsustainability for new projects (either construction or renting out purchased properties) while older projects from a while back might benefit from cheaper financing, lower construction costs, etc and hence allowing for lower rents. This is also reflected in the building permits, which are down and far away from matching the demand (exacerbating shortages) as often the economics do not work out.
Note that the quoted rents above are also consistent with the folklore rule-of-thumb that every 1000 €/sqm increase in price requires an increase of 4 €/sqm/month in rent. This comes out to an effective interest rate of 3.84% at 25% cost factor (or flat 4.8% at 0% cost factor).
Market Data
In the following we briefly summarize some of the data that we will use in the analysis.
Current Rent Situation in Berlin
Based on 2024-2025 data, average cold rents (excluding utilities) in Berlin are:
- Citywide average (existing apartments): 12.50 €/sqm/month
- New-build apartments: 18.00 €/sqm/month
- Mitte (center): 20.00 €/sqm/month
- Charlottenburg: 15.50 €/sqm/month
- Spandau (outer): 9.50 €/sqm/month
Current Square Meter Prices
Based on 2024-2025 data, average purchase prices for existing apartments in Berlin are:
- Citywide average: 4,000 €/sqm
- Mitte (center): 6,400 €/sqm
- Charlottenburg: 4,960 €/sqm
- Spandau (outer): 3,040 €/sqm
and average prices for new-build apartments are:
- Citywide average: 8,300 €/sqm
- Mitte (center): 14,500 €/sqm
- Charlottenburg: 11,400 €/sqm
- Spandau (outer): 6,000 €/sqm
Median construction costs in Germany are 4,470 €/sqm (for multi-family housing, incl. VAT) (Mieterbund Report, Figure 11).
Building Permits in Berlin
The economic constraints we have discussed manifest in Berlin’s building permit trends. According to the official statistics office, Berlin approved 9,772 dwellings in 2024 (−38.5% year-on-year) (source).
Nationally, Germany issued about 215,900 residential building permits in 2024 (−16.8% year-on-year)—the lowest since 2010 and far below the 400,000‑unit target (Destatis). A slight rebound was reported in April 2025 to roughly 18,500 permits (+4.9%) (Destatis), but monthly levels remain insufficient.
Detailed Analysis
The following sections explain the natural constraints, formulas, and scenarios in detail. Later below there is also an interactive calculator that allows you to play around with the parameters and explore various scenarios.
Natural Constraints
In this section, we outline the fundamental economic constraints that shape feasible rent and price configurations in the housing market. These arise from basic principles: costs must be covered, prices cannot defy construction realities, and rents must remain affordable for tenants. Note that all rents discussed are “cold rents,” excluding utilities such as heating, water, electricity, internet, etc. We are considering a pure buy-to-rent or build-to-rent model without self-occupancy or profit motives.
Opportunity Cost of Capital
For buying-to-rent or building-to-rent to be economically viable, we need capital, either obtained via a loan (debt), e.g., from a bank or via our own capital (equity). In both cases we have to pay interest on that money, either in the form of actual interest to the bank or in the form of opportunity cost, which is essentially the return you forgo by not investing the money somewhere else; we refer to both costs here as opportunity cost.
The monthly rent per square meter $r$ must at least cover the opportunity cost of the capital invested in the property per square meter, plus additional ownership costs (maintenance, property taxes, etc.). This is expressed as:
\[r \geq \left( \frac{p}{12} \times i \right) \times (1 + c)\]where:
- $p$: price per square meter (€/sqm)
- $i$: annual interest rate
- $c$: cost factor (maintenance, taxes, etc.)
Meaning: Below this value the rent does not cover the costs of ownership.
Replication Cost Constraint
Property prices cannot sustainably fall below the cost of building or obtaining a new equivalent property:
\[p \geq rc\]where $rc$ is the replication cost (€/sqm), i.e., construction costs or cost of buying.
Meaning: The price $p$ to construct or buy a square meter is at least $rc$.
Affordability Constraint
Rent must be affordable based on income. Typically, housing costs should not exceed 33% of net income:
\[r \leq \frac{n \times 0.33}{s}\]where:
- $n$: monthly net income (€)
- $s$: square meters needed
Note that the 33% is arbitrary but a good estimate; in the calculator below one can simply dial in the desired maximum rent, either via the monthly income or the square meters needed, if one does not agree with the 33% estimate, which admittedly becomes more and more challenging to meet.
Meaning: Rents above this threshold are unaffordable.
Minimum Required Rent
The minimum required rent, based on opportunity cost and replication cost, is calculated at the replication cost price:
\[r_{min} = \left( \frac{rc}{12} \times i \right) \times (1 + c)\]This value represents the lowest feasible rent required to cover costs.
Interactive Calculator
Feel free to play around and choose values that you think are reasonable. In particular, the interest rate has significant impact on the required rent per sqm.
The sliders adjust:
- Interest Rate: Annual opportunity cost or loan rate (i).
- Cost Factor: Additional ownership costs as a percentage (c).
- Replication Cost: Minimum construction/purchase price per sqm (rc).
- Net Income: Monthly net income for affordability (n).
- Space Needed (sqm): Living space required for affordability (s).
The light green area is the feasible region where all constraints are satisfied. Adjust the sliders to see how parameters affect feasibility.
Common Scenarios
Using current Berlin real estate data (as of 2024-2025), we explore reasonable configurations. We assume a cost factor $c = 0.25$ (25% for maintenance, taxes, etc.) and a (relatively) low interest rate $i = 0.03$ (3%); this is also rather conservative for the opportunity cost of equity. All calculations use the minimum rent formula:
\[r = \left( \frac{p}{12} \times i \right) \times (1 + c)\]where $p$ is the effective price per sqm (either construction cost or purchase price).
Median Construction Cost Scenario
- Median construction cost across Germany: $p = 4{,}470$ €/sqm (for multi-family housing, incl. VAT) (Mieterbund Report, Figure 11)
- Interest rate: 3%
- Minimum required rent: $r_{min} = \left( \frac{4{,}470}{12} \times 0.03 \right) \times 1.25 \approx 13.96$ €/sqm/month
This represents the lowest sustainable rent for new builds at median costs, just covering opportunity costs without profit.
Berlin Purchase Scenarios
Purchase prices vary by location. We calculate the minimum rent needed to cover costs for existing and new-build properties.
City Center (Mitte)
- Existing: $p = 8{,}000$ €/sqm → $r \approx 25.00$ €/sqm/month
- New-build: $p = 14{,}500$ €/sqm → $r \approx 45.31$ €/sqm/month
Charlottenburg
- Existing: $p = 6{,}300$ €/sqm → $r \approx 19.69$ €/sqm/month
- New-build: $p = 11{,}400$ €/sqm → $r \approx 35.63$ €/sqm/month
Outer District (Spandau)
- Existing: $p = 3{,}200$ €/sqm → $r \approx 10.00$ €/sqm/month
- New-build: $p = 6{,}000$ €/sqm → $r \approx 18.75$ €/sqm/month
These minimum rents assume covering spot costs only (no profit motive). Higher interest rates (e.g., 4% for private loans) would increase required rents accordingly. Conversely, many properties were financed at lower interest rates and/or built at lower construction costs years ago, significantly reducing the required rent per sqm.
Rent-implied Prices
Based on 2024-2025 data, average cold rents (excluding utilities) in Berlin are:
- Citywide average (existing apartments): 12.50 €/sqm/month
- New-build apartments: 18.00 €/sqm/month
- Mitte (center): 20.00 €/sqm/month
- Charlottenburg: 15.50 €/sqm/month
- Spandau (outer): 9.50 €/sqm/month
To connect this to our analysis, we perform an “inverse” calculation: given the rent r, what implied price per sqm (p) would justify it under the opportunity cost constraint? Solving the formula:
\[p = \frac{r \times 12}{i \times (1 + c)}\]Using $i=0.03$ and $c=0.25$ (as before):
- Citywide average: p ≈ 4,000 €/sqm (below median construction cost of 4,470 €/sqm and city average purchase of 5,500 €/sqm)
- New-build: p ≈ 5,760 €/sqm (below city new-build average of 8,300 €/sqm)
- Mitte (center): p ≈ 6,400 €/sqm (below actual Mitte existing purchase of 8,000 €/sqm)
- Charlottenburg: p ≈ 4,960 €/sqm (below 6,300 €/sqm)
- Spandau (outer): p ≈ 3,040 €/sqm (slightly below 3,200 €/sqm)
These implied prices are often lower than actual replication (construction or purchase) costs from the market data. This suggests that at current rents, especially in central areas, owners may not fully cover opportunity costs unless interest rates are very low, costs are minimized, or significant depreciation is expected or has occurred.
References
- Investitionsbank Berlin – Housing Market Report 2024 (Summary, EN)
- Guthmann Estate – Berlin Real Estate Market Report (2025)
- InvestRopa – Average Rent & Price per m² in Berlin (2025)
- InvestRopa – Average Rent in Berlin by District (2025)
- CBRE – Berlin Housing Market Report 2025
- IfW Kiel – GREIX Rental Price Index Q2 2025
- Integra Dom – Apartment Rental Prices in Germany, Q3 2024
- The Guardian – Berlin’s Housing Crisis and Furnished Rental Market (2025)
- The Berliner – Berlin Rent Increases Outpace the Rest of Germany (2024)
- Statistik Berlin-Brandenburg – Building Permits Press Release (H1 2025)
- BBU – Building Permits in Berlin, Jan–Jul 2024
- Reuters – Germany’s Residential Building Permits Fall to 2010 Low (2025)
- Destatis – Building and Housing Statistics (2025)
- REFIRE – Germany’s Housing Pipeline Crumbles as Permits Plunge
- Mieterbund Report, Figure 11
- Tagesspiegel - Reich und raffgierig?: Sieben überraschende Erkenntnisse über Deutschlands Vermieter
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