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

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  • Holtemöller Oliver

    (Halle Institute for Economic Research (IWH), Halle (Saale), Germany)

  • Schulz Rainer

    (University of Aberdeen, Aberdeen, United Kingdom of Great Britain and Northern Ireland)

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.

Suggested Citation

  • Holtemöller Oliver & Schulz Rainer, 2010. "Investor Rationality and House Price Bubbles: Berlin and the German Reunification," German Economic Review, De Gruyter, vol. 11(4), pages 465-486, December.
    • Handle: RePEc:bpj:germec:v:11:y:2010:i:4:p:465-486
    DOI: 10.1111/j.1468-0475.2009.00499.x
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    Cited by:

    1. Tomaso Duso & Claus Michelsen & Maximilian Schäfer & Kevin Ducbao Tran, 2021. "Airbnb and Rental Markets: Evidence from Berlin," Bristol Economics Discussion Papers 21/746, School of Economics, University of Bristol, UK.
    2. Holtemöller, Oliver & Lindner, Axel, 2018. "Die wirtschaftliche Entwicklung Sachsen-Anhalts seit 1990," IWH Discussion Papers 6/2018, Halle Institute for Economic Research (IWH).
    3. Projektgruppe Gemeinschaftsdiagnose, 2010. "The Recovery Continues - Considerable Risks Remain," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 63(08), pages 03-78, April.
    4. Walter Kraemer, 2010. "The Cult of Statistical Significance," CESifo Working Paper Series 3246, CESifo.

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