The Federal Office for Building and Regional Planning

Research Project: Is there a price bubble in the German market for residential property?

Project briefing

Markets for assets such as real estate are prone to price exaggeration. Overconfidence, herd instincts and other behavioural anomalies of investors can lead to self-enforcing price trends and the formation of price bubbles. Speculative debt and banking crises may result. The research project examined whether the price increase for residential properties observed in Germany since 2009 indicates a price bubble. A measuring and analytical system that can be used to identify overheating at an early stage has been designed for this purpose.

Background

Price fluctuations for assets, including real estate, can be viewed as the result of rational investor responses to general uncertainty about future returns. People do not behave rationally when making decisions that involve a high degree of uncertainty. Their behaviour is characterised by behavioural anomalies such as herd instinct, self-overestimation, loss aversion, hasty conclusions, attention deficits and the orientation towards readily available information. These can lead to price trends for assets increasing automatically, regardless of whether they have been triggered by fundamental changes or by mere coincidences.

Strong price exaggerations in the real estate markets are problematic, especially when the purchase of real estate is largely financed by credit. Rising prices for residential real estate increase housing wealth and thus its value as collateral for loans; at the same time, the construction boom is fuelling income development in the construction industry. Both stimulate the economy. The resulting income and employment gains as a second-round effects again increase the demand for apartments and cause further price rises.

An economy can drift into a speculative debt crisis. A pyramid scheme emerges that only breaks down when price increases fall short of expectations and the first borrowers are therefore no longer able to service their loans. The bursting of the bubble then leads to a banking crisis, which in turn is associated with serious real economic repercussions in the form of slumps in production, underutilisation of resources, unemployment and loss of wealth and income.

Objective

It is not possible to assess whether an asset market is overheated simply by observing increased dynamics. A reference or a reference system is required to which the observed price increase can be related. Various methods have been proposed for this.

The research project was intended to take up and systematise the previous discussion. If possible, it should result in a better structural understanding of the drivers of price developments and the decision-making behaviour of investors. In particular, the importance of irrational factors that lead to changes in prices was examined in more detail. A differentiation according to regional and structural segments was planned.

Based on this preparatory work, a system was designed which can identify overheating at an early stage in the nationwide residential property market as well as in regional markets - possibly using forecasts.

The contractor for the project was KIEL ECONOMICS, Kiel.

Contact us

  • Matthias Walterbacher
    Federal Institute for Research on Building, Urban Affairs and Spatial Development
    Division WB 1 „General Housing and Property Markets“
    Phone: +49 228 99401-1421
    Email: matthias.waltersbacher@bbr.bund.de

  • Alexander Schürt
    Federal Institute for Research on Building, Urban Affairs and Spatial Development
    Division WB 1 „General Housing and Property Markets“
    Phone: +49 228 99401-2239
    Email: alexander.schuert@bbr.bund.de

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