Assessing house prices in Germany: evidence from a regional data set

Abstract

Purpose With a view to the unconventional monetary policy measures implemented in the euro area in recent years, this study aims to investigate whether the recent house price increases in Germany are signals of an incipient overheating of the German housing market. Design/methodology/approach This paper presents a valuation measure for residential property based on a large and exhaustive regional panel data set for Germany. The fitted house prices from a panel regression at the district level, taking into account spatial spillovers, are taken as a measure of the fundamental equilibrium house prices, which can be aggregated for various regional subsets. Findings The estimation results suggest that apartment prices over the past years substantially exceeded the fundamental price suggested by the model, in particular in the big cities. Single-family houses appear to be markedly overvalued mainly in the cities. The low level of interest rates in recent years appears to have contributed to the emergence of misalignments. Originality/value Exploiting the variation across local housing markets, the estimation approach provides value-add for the estimation of house price valuation results in various regional subsets, as conventional time-series approaches to valuing property are subject to severe data limitations in the case of Germany.

Speculative Price Bubbles in Urban Housing Markets in Germany

“…Using data for more than 400 regions in the period from 2004 through 2012, they capture the entire spatial variation of the German housing market. Kajuth et al (2013) find that for most analyzed regions, house prices reflect quite well the economic conditions. However, in metropolitan areas, a substantial overvaluation by up to 25% is detected, which stands in some contrast to the findings of an de Meulen and Micheli (2013).…”

“…Having the lessons from the Great Recession in mind (Duca et al, 2010), current housing market dynamics raised concerns about the formation of a speculative house price bubble among policy makers and central bank staff in Germany. In 2013, the Deutsche Bundesbank reported an overvaluation of German metropolitan residential real estate of up to 25% (see, Deutsche Bundesbank, 2013;Kajuth et al, 2013). In response, the International Monetary Fund (IMF) calls on the German government for an enhancement of its macro-prudential toolkit, to be prepared for the case of an overheating housing market, which is identified as a potential threat to financial market stability (IMF, 2014).…”

“…The most prominently cited work is that of Kajuth et al (2013), who follow a "classical" approach by regressing house prices on market fundamentals. Using data for more than 400 regions in the period from 2004 through 2012, they capture the entire spatial variation of the German housing market.…”

“…At least in the great recession (2007)(2008)(2009) the pricing mechanism should have been disturbed substantially, which directly leads to biased estimates of the fundamental prices in the post-crisis period. For this reason, the conclusions of Kajuth et al (2013) should be treated cautiously.…”

A Comprehensive Method for House Price Sustainability Assessment in the Czech Republic

“…For a description of the models used by central banks, see, for example, Kajuth et al (2013), Nobili and Zollino (2012) and McQuinn (2004). For an exhaustive survey of the existing methods for estimating and evaluating equilibrium house prices, including a list of applications to the Czech Republic, see Hlaváček and Komárek (2010).…”