Crown Jewel or Problem Child? The role of Central Business Districts in German Housing Markets

Since the foundational work of Alonso, Muth and Mills, Urban Economists have viewed cities as monocentric entities centered around a Central Business District (CBD). As it is costly to travel from the periphery to the Center, prices are naturally lower in the periphery to compensate. While quite intuitive, the monocentric city model has often been scrutinized, as cities in reality are often polycentric and take a variety of shapes and forms. Economists have therefore been investigating if urban gradients actually exist as postulated by theory. Lately, there has also been a lot of interest in how urban gradients evolve over time. In the light of the rise of online retail and working from home in the last decade, are urban centers losing their appeal? We argue that a main problem in this literature has been the insufficient definition of what actually constitutes the center. We therefore use a novel approach to define the CBD. Using the universe of registered German businesses, we define the urban center via density thresholds akin and then investigate the price gradients for the entirety of all 1.108 cities in Germany. In our analysis we find that there is a large heterogeneity of German cities On average, urban centers are 11 % more expensive than the rest of the city. However, among cities with more than one million inhabitants, the gradient is 21 %, while 27 % of German cities even exhibit negative urban gradients. Over the last 14 years, gradients have decreased in only a few selected cities. Overall, they have been increasing. We find that a significant share of the price premium comes from the fact that apartments in the CBD are well connected to jobs and other destinations within the city. Once accounting for the connection to transport infrastructure, the urban gradients decline considerably but remain significant in many cities. This suggests that it is not as much urbanity but centrality that makes city centers more expensive. Our main contribution to the literature is a novel way of defining the CBD. In the theoretical literature, the CBD is usually defined as a point in the center of the city. In almost all studies, the empirical literature just adopts this definition. However, in the reality cities have often developed quite differently. In Germany, the destruction of cities in the second world war and 40 years of Socialism and centralized planning have also left a mark on cities. We therefore construct CBDs based on the actual density of commercial establishments. Among those establishments are retail, private and public services, restaurants and bars, hotels and cultural institutions. The dataset originates from Nexiga GmbH and contains over 8 million observations. For each city we determine the point with the maximum density of commercial establishments. We then define areas that achieve at least 90 % of this density as the commercial center and areas that feature between 60 and 90 % of the density as the residential center. About one third of apartments in German cities are thus defined to be in the center. Our methodology is able to handle the polycentricity problem that has plagued the literature for a long time.