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Speculative price bubbles in urban housing markets

Empirical evidence from Germany

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Abstract

In the light of the unconventional monetary policies implemented by most large central banks around the world, there is an intense debate about the potential impact on the prices of capital assets. Particularly in Germany, skepticism about the sustainability of the current policy by the European Central Bank is wide spread and concerns about the emergence of a speculative price bubble in the housing market are increasing. The present study analyzes a comprehensive data set covering 127 large German cities from 1990 through 2013, using tests for speculative bubbles, both at a national and city level. Furthermore, we apply two new testing approaches: panel-data and principal components versions of explosive root tests. We find evidence for explosive price increases in many cities. However, it is only in select urban housing markets that prices decouple from their fundamental values. There is no evidence for speculative price movements nationally.

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Notes

  1. The ca rates are the initial yield of real estate investments. They are defined as the annual rental income divided by the per square meter price of the apartment. We calculated them based on the first principal components of the 127 German cities, as introduced in Sect. 4.2. The implicit risk premia are calculated as the spread between the cap rates and the yield of German 10-year treasury bonds.

  2. In a nutshell, the value of a real option describes investors willingness to pay to have the options to modify an existing building lot. In the land context, for example, undeveloped land contains a premium for the option to develop the site in the future, while this premium is lost in cases of already developed sites (for an overview, see Reuer and Tong (2007)).

  3. For more details, see Hampe and Wenzel (2011).

  4. All the computations in this paper are carried out using the codes written by the authors in the statistical programming language R (R Core Team 2013). These codes are available upon request.

  5. Test results are available on request.

  6. The share of variance accounted for by the first principal component ranges from roughly 45 to 70% for newly built apartments and approximately one-third to two-thirds for second-hand apartments.

  7. EONIA stands for the Euro OverNight Index Average, which is a weighted average of all overnight unsecured lending transactions in the interbank market in euros. It was used because, unlike the Bank of Israel, the European Central Bank does not have a 1-year interest rate.

  8. http://www.consensuseconomics.com/, http://www.focus-economics.com/.

  9. The time series cover the period between January 1999 and December 2015 and were taken from the Deutsche Bundesbank database .

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Authors and Affiliations

  1. German Institute for Economic Research, Mohrenstraße 58, 10117, Berlin, Germany

    Konstantin A. Kholodilin & Claus Michelsen

  2. National Research University - Higher School of Economics St. Petersburg, 3A Kantemirovskaya Street 3A, St.Petersburg, Russia, 194100

    Konstantin A. Kholodilin

  3. Institut für Finanzdienstleistungen e.V., Grindelallee 100, 20146, Hamburg, Germany

    Dirk Ulbricht

Authors
  1. Konstantin A. Kholodilin
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  2. Claus Michelsen
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  3. Dirk Ulbricht
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Correspondence to Claus Michelsen.

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Kholodilin, K.A., Michelsen, C. & Ulbricht, D. Speculative price bubbles in urban housing markets. Empir Econ 55, 1957–1983 (2018). https://doi.org/10.1007/s00181-017-1347-x

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