Speculative Price Bubbles in Urban Housing Markets in Germany

41 Pages Posted: 5 Nov 2014

See all articles by Konstantin A. Kholodilin

Konstantin A. Kholodilin

German Institute for Economic Research (DIW Berlin)

Claus Michelsen

German Institute for Economic Research (DIW)

Dirk Ulbricht

German Institute for Economic Research (DIW)

Date Written: October 2014

Abstract

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.

Keywords: Speculative bubble, explosive root, German cities

JEL Classification: C21, C23, C53

Suggested Citation

Kholodilin, Konstantin A. and Michelsen, Claus and Ulbricht, Dirk, Speculative Price Bubbles in Urban Housing Markets in Germany (October 2014). DIW Berlin Discussion Paper No. 1417. Available at SSRN: https://ssrn.com/abstract=2519076 or http://dx.doi.org/10.2139/ssrn.2519076

Konstantin A. Kholodilin (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Claus Michelsen

German Institute for Economic Research (DIW) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Dirk Ulbricht

German Institute for Economic Research (DIW) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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