A Novel Housing Price Misalignment Indicator for Germany

43 Pages Posted: 11 Nov 2019

See all articles by Markus Hertrich

Markus Hertrich

University of Basel - Center for Economic Science (WWZ) - Department of Finance; Deutsche Bundesbank

Date Written: 2019

Abstract

From 2014 until present, housing prices in Germany have been rising faster than consumer prices in all quarters except one, raising concerns about an excessive over-heating of the housing market. To assess the vulnerability of the German housing market to a future realignment of prices or even a housing bust, this paper develops a housing price misalignment indicator that is composed of seven indicators, which are commonly associated with the fundamental value of residential property. An empirical application to the most recent data suggests that the German housing market exhibits an overvaluation of approximately 11%, where interest rate risk and a relatively advanced stage of the housing cycle are identified as the main factors fueling these imbalances, while a rather solid debt-servicing capacity mitigates these imbalances since end-2009.

Keywords: composite indicator, fundamental value, housing market, imbalances, loose monetary policy, price misalignment

JEL Classification: C43, C51, E32, E37, E43, G12, R21, R28, R31

Suggested Citation

Hertrich, Markus, A Novel Housing Price Misalignment Indicator for Germany (2019). Deutsche Bundesbank Discussion Paper No. 31/2019. Available at SSRN: https://ssrn.com/abstract=3473026

Markus Hertrich (Contact Author)

University of Basel - Center for Economic Science (WWZ) - Department of Finance ( email )

Peter Merian-Weg 6
Basel, 4052
Switzerland

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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