Understanding Spatial House Price Dynamics in a Housing Boom

We examine the evolution of spatial house price dispersion during Germany’s recent housing boom. Using a dataset of sales listings, we find that house price dispersion has significantly increased, which is driven entirely by rising price variation across postal codes. We show that both price divergence across labor market regions and widening spatial price variation within these regions are important factors for this trend. We propose and calibrate a directed search model of the housing market to understand the driving forces of rising spatial price dispersion, highlighting the role of housing supply, housing demand and frictions in the matching process between buyers and sellers. While shifts in housing supply, housing demand and search frictions all matter for overall price increases and for regional price differences, we find that variation in housing demand is the primary factor contributing to the widening spatial dispersion. Our model-based demand and supply components correlate strongly with regional fundamentals, suggesting that they capture economically meaningful variation in local housing markets.