Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/29987
Authors: 
Weiß, Dominik
Year of Publication: 
2009
Series/Report no.: 
IWH Discussion Papers 11/2009
Abstract: 
German urban renewal programs are favoring the cities in the Eastern part since the reunification in 1990. This was accompanied additionally by attractive tax incentives, designed as an accelerated declining balance method of depreciation for housing investments during the late 1990s. The accumulated needs for comfortable housing after 40 years of a disastrous housing policy of the GDR era were generally accepted as justification for the subvention policy. But various subsidies and tax incentives caused a construction boom, false allocations, and a price bubble in Eastern Germany. After recognizing that the expansion of housing supply was not in line with the demographic development and that high vacancy rates were jeopardizing housing companies and their financial backers, policy changed in 2001. Up to now, the government provides demolition grants to reduce the vast oversupply. By means of a real option approach, it is explained how different available forms of subsidies and economic incentives for landlords lift real estate values. The option value representing growth expectations and opportunities is calculated as an observable market value less an estimated fundamental value. Empirical results disclose higher option premiums for cities in Eastern Germany and a strong correlation of the option premium with urban renewal spending.
Subjects: 
Real Option
Housing Market
East Germany
Urban Renewal Subsidies
JEL: 
R0
H2
Persistent Identifier of the first edition: 
Additional Information: 
Corrected version uploaded 2016-07-14.
Document Type: 
Working Paper

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