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Is there an equilibrating relationship between house prices and replacement cost? Empirical evidence from Berlin

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  • Schulz, Rainer
  • Werwatz, Axel

Abstract

It is a feature of competitive markets with forward-looking participants that a good's benefit and its production cost are equalized in equilibrium and that no resources are wasted during the adjustment process. For housing markets, there is mixed evidence whether they meet this standard of allocative efficiency. Based on a unique data set with rich information on prices and cost, we examine the market for single-family houses in Germany's capital Berlin. At the aggregate market level, we find that prices and cost tend to equalize in the long run. Short-run adjustment appears to be sufficiently fast and properly anticipated to prevent systematic excess profit opportunities. At the cross sectional level of individual houses, we find support that resources are allocated efficiently between different market segments. Taken together, our results provide sufficient evidence that the market in Berlin is efficient.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 69 (2011)
Issue (Month): 3 (May)
Pages: 288-302

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Handle: RePEc:eee:juecon:v:69:y:2011:i:3:p:288-302

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Web page: http://www.elsevier.com/locate/inca/622905

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Keywords: Tobin's Q Housing market efficiency Real estate valuation;

References

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Cited by:
  1. Kolbe, Jens & Schulz, Rainer & Wersing, Martin & Werwatz, Axel, 2013. "Location, location, location: Extracting location value from house prices," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order, Verein für Socialpolitik / German Economic Association 79732, Verein für Socialpolitik / German Economic Association.
  2. Jens Kolbe & Rainer Schulz & Martin Wersing & Axel Werwatz, 2012. "Location, Location, Location: Extracting Location Value from House Prices," Discussion Papers of DIW Berlin, DIW Berlin, German Institute for Economic Research 1216, DIW Berlin, German Institute for Economic Research.
  3. Stephen D. Oliner & Joseph B. Nichols & Michael R. Mulhall, 2012. "Swings in commercial and residential land prices in the United States," Working Papers, American Enterprise Institute 35088, American Enterprise Institute.

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