Shrinking And Growing Cities - Asymmetric Real Estate Price Reactions?

The population of Germany will be one of the first in the western hemisphere to undergo considerable permanent shrinkage. The fact that these envisaged demographic developments will have a significant effect on the pensions, health and nursing care insurance systems, and will hence heavily influence the lives of people in Germany, has not only been extensively underpinned with quantitative data but has also generally been recognised by the population at large, even if the emphasis tends to be on the ageing phenomenon rather than population decline. By contrast, awareness of the effects of projected population decline and ageing on adjacent areas of greater or lesser importance such as regional real estates markets, remains in its infancy. DiPasquale/Wheaton (1996) demonstrate a significant positive influence of growth in the absolute number of households on real estate prices for 20 US-American Consolidated Metropolitan Statistical Areas (CMSAs) over the period 1980 to 1990. Terrones and Otrok (2004) estimate the growth in house prices in a multivariate model and arrive at a significant influence of population growth on a highly aggregated national level. Fratantoni et. al. (2005) evaluate a positive correlation between population growth and increased house prices at the level of the US states. Neither studies examine separately the effects of population declines, since decreases in population numbers in the regions they analyse have hardly ever been previously recorded. Finally Cerny, Miles und Schmidt (2005) calibrate the impacts of ageing and social security reform upon the demand for housing, but fail to undertake an empirical assessment of the relevant parameters. As far as the authors are aware, no differentiated modelling of population growth and decline, or of their effects on real estate prices, currently exists, although such a task could be worth performing: Leaving aside any regional restrictions on land available for building, the chronic under-utilisation of European building production capacities means that an increase in demand could largely be satisfied without positive price impulses. By contrast, if demand were to be reduced there is a possibility of a relatively inelastic supply reaction: In view of the typical constructions methods prevalent in the European economies, the assumption of downward rigidity in supply quantities in the short and medium term seems to be confirmed by these results. The example of eastern Germany, one of the regions in the world most affected by population decline, shows that in spite of considerable levels of unoccupied buildings ñ up to 20% in some areas (Dascher, 2005) ñ capacity reductions by demolition are only being induced by cost-covering state demolition subsidies that in some cases even include debt repayments. Given that demand ñ both in the rental and the property sectors ñ also reacts with low price elasticity, significant price decreases in the real estate sector could result. The dominant position of real estates assets in private household portfolios in most western economies means that significant complications could arise e.g. for consumption and growth. This work supplements existing studies by examining real estate prices for single-family houses on the disaggregated level of German urban districts (kreisfreie St‰dte) and explicitly studying the differing effects of population growth and decline. At the same time, checks are made for other potentially relevant factors influencing real estate prices such as household income, building costs and regional urban residential structures.