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Investor Rationality and House Price Bubbles: Berlin and the German Reunification

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  • Oliver Holtemöller
  • Rainer Schulz

Abstract

We analyze the behavior of investors in the Berlin rental apartment house market over the years 1980-2004. Using constant-quality multipliers (price-rent ratios), we reject the hypothesis that multipliers in the market were set in a rational manner. Supported by narrative evidence, we conjecture that investors misjudged the economic effects of the German reunification. To examine this, we employ a stylized structural economic model and analyze the effects of shocks on rational multipliers. It seems that investors confused the reunification with a permanent supply side shock to the economy. By basing their investment decisions on this misjudgement, investors behaved irrationally, but in a very uncertain and unprecedented environment. Copyright 2010 The Authors. German Economic Review 2010 Verein für Socialpolitik.

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Bibliographic Info

Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 11 (2010)
Issue (Month): (November)
Pages: 465-486

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Handle: RePEc:bla:germec:v:11:y:2010:i::p:465-486

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  1. Chow, Gregory C & Lin, An-loh, 1971. "Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 372-75, November.
  2. Britta Hamburg & Mathias Hoffmann & Joachim Keller, 2008. "Consumption, wealth and business cycles in Germany," Empirical Economics, Springer, vol. 34(3), pages 451-476, June.
  3. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
  4. Marimon, Ramon & Scott, Andrew (ed.), 1999. "Computational Methods for the Study of Dynamic Economies," OUP Catalogue, Oxford University Press, number 9780198294979, September.
  5. Burda, Michael C. & Fuchs-Schündeln, Nikola & Buch, Claudia M. & Sinn, Hans-Werner, 2006. "Factor reallocation in eastern Germany after reunification," Munich Reprints in Economics 19974, University of Munich, Department of Economics.
  6. Grieson, Ronald E, 1973. "The Supply of Rental Housing: Comment," American Economic Review, American Economic Association, vol. 63(3), pages 433-36, June.
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