Investor Rationality and House Price Bubbles: Berlin and the German Reunification
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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Volume (Year): 11 (2010)
Issue (Month): (November)
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