Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/104728 
Year of Publication: 
2014
Series/Report no.: 
DIW Discussion Papers No. 1417
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
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.
Subjects: 
speculative bubble
explosive root
German cities
JEL: 
C21
C23
C53
Document Type: 
Working Paper

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