An Analysis of Property Price Trends in Germany - Implications for Property Valuation Practice and Investment Decision Making

Press articles in Germany that predicted a severe decline in property prices within certain regions caused by demographic developments have recently served to undermine the people's sense of security. This lead to an intense debate if and to what extent property price trends are affected by certain macroeconomic variables. Therefore, this paper examines property price trends in Germany from 1971 until 2003 based on the property price indices of the Ring of German Estate Agents (ëRing Deutscher Makler'). The authors investigate correlations and dependencies between property price trends and financial as well as macroeconomic variables by using a multivariate regression model. The analysis is performed by taking into account structural breaks in the time series due to the German reunification or severe interference in the property market by the government. Furthermore, covariates like regional differences and the properties' different quality and performance characteristics are considered. Among other results, the analysis shows a different behaviour of property prices with regard to the properties' performance characteristics: While average and low-quality buildings' prices fell significantly under adverse macroeconomic conditions, high-quality buildings' prices remained stable in the most instances or even increased within the same time frame. The effects of the exogenous variables and covariates are quantified and implications for property valuation and investment decision making are deduced subsequently. In this regard it becomes evident that the regional economic attractiveness as well as the single buildings' characteristics need to be examined in more detail in order to produce appropriate assessment results.