All of Germany has legalized prostitution. Berlin actually lacks a red light district though that other German cities have because there isn't a requirement for brothels to congregate in that city.
Berlin is dirt cheap to live in, which is probably why it is a magnet for artists (what they're producing, aside from avant-garde stuff and electronic music, I'm not sure, as I asked and just got the video above
). I've heard of people renting spacious apartments in trendy Berlin neighbourhoods like Prenzlauer Berg and Neukolln for dirt cheap. Couple that with cheap food, museums, entertainment, and Berlin definitely has the edge over the traditional centres of art to the west - London, Paris, Amsterdam, Florence, and Rome.