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Speculative Price Bubbles in Urban Housing Markets in Germany

Listed author(s):
  • Konstantin A. Kholodilin
  • Claus Michelsen
  • Dirk Ulbricht

The surge in the German house prices starting in 2010 raised fears about the emergence of a speculative bubble. Given a local nature of housing markets, it is not clear to what extent the bubble, if any, is spread across different cities. In this paper, we test for speculative house price bubbles in 127 large German cities over the last 20 years. Along with testing bubbles for each city separately, we apply two new testing approaches: a panel data and principal components version of explosive root tests. We define bubble as an explosive growth of prices that is not supported by the rent increase. Therefore, to check for the existence of bubbles, we examine prices, rents, and price-to-rent ratios. We find evidence for explosive price increases in many cities, especially for the case of newly built housing. However, only in few urban housing markets prices decouple from their fundamental values. On the national level, we do not see evidence for speculative price movements. Overall, we find that the danger of a build-up of a speculative price bubble in the German housing market is rather moderate.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.487920.de/dp1417.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1417.

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Length: IV, 35 p.
Date of creation: 2014
Handle: RePEc:diw:diwwpp:dp1417
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  1. Hoffmann, Johannes & Kurz, Claudia, 2002. "Rent indices for housing in West Germany 1985 to 1998," Discussion Paper Series 1: Economic Studies 2002,01, Deutsche Bundesbank, Research Centre.
  2. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
  3. Haas, Heide & Henger, Ralph & Voigtländer, Michael, 2013. "Reale Nachfrage oder bloße Spekulation: Ist der deutsche Wohnimmobilienmarkt überhitzt?," IW policy papers 8/2013, Institut der deutschen Wirtschaft Köln (IW) / Cologne Institute for Economic Research.
  4. Peter C.B. Phillips & Shu-Ping Shi & Jun Yu, 2011. "Testing for Multiple Bubbles," Working Papers 09-2011, Singapore Management University, School of Economics.
  5. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2016. "Sovereigns Versus Banks: Credit, Crises, And Consequences," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 45-79, February.
  6. Margaret Hwang Smith & Gary Smith, 2006. "Bubble, Bubble, Where's the Housing Bubble?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 37(1), pages 1-68.
  7. Daniel Fernández-Kranz & Mark Hon, 2006. "A Cross-Section Analysis of the Income Elasticity of Housing Demand in Spain: Is There a Real Estate Bubble?," The Journal of Real Estate Finance and Economics, Springer, vol. 32(4), pages 449-470, June.
  8. Duca, John V. & Muellbauer, John & Murphy, Anthony, 2010. "Housing markets and the financial crisis of 2007-2009: Lessons for the future," Journal of Financial Stability, Elsevier, vol. 6(4), pages 203-217, December.
  9. Ansgar Belke & Marcel Wiedmann, 2005. "Boom or Bubble in the US Real Estate Market?," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 260/2005, Department of Economics, University of Hohenheim, Germany.
  10. Jonathan McCarthy & Richard Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-17.
  11. Min Hwang & John M. Quigley, 2006. "Economic Fundamentals In Local Housing Markets: Evidence From U.S. Metropolitan Regions," Journal of Regional Science, Wiley Blackwell, vol. 46(3), pages 425-453.
  12. Xi Chen & Michael Funke, 2013. "Renewed Momentum in the German Housing Market: Boom or Bubble?," CESifo Working Paper Series 4287, CESifo Group Munich.
  13. Karl E. Case & Robert J. Shiller, 2003. "Is There a Bubble in the Housing Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 299-362.
  14. Philipp Meulen & Martin Micheli, 2013. "Droht eine Immobilienpreisblase in Deutschland?," Wirtschaftsdienst, Springer;German National Library of Economics, vol. 93(8), pages 539-544, August.
  15. Kajuth, Florian & Knetsch, Thomas A. & Pinkwart, Nicolas, 2013. "Assessing house prices in Germany: Evidence from an estimated stock-flow model using regional data," Discussion Papers 46/2013, Deutsche Bundesbank, Research Centre.
  16. Claus Michelsen & Dominik Weiss, 2010. "What happened to the East German housing market? A historical perspective on the role of public funding," Post-Communist Economies, Taylor & Francis Journals, vol. 22(3), pages 387-409.
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