Investor Rationality and House Price Bubbles: Berlin and the German Reunification

Oliver Holtemöller and Rainer Schulz

German Economic Review, 2010, vol. 11, issue 4, 465-486

Abstract: Abstract. We analyze the behavior of investors in the Berlin rental apartment house market over the years 1980–2004. Using constant‐quality multipliers (price–rent ratios), we reject the hypothesis that multipliers in the market were set in a rational manner. Supported by narrative evidence, we conjecture that investors misjudged the economic effects of the German reunification. To examine this, we employ a stylized structural economic model and analyze the effects of shocks on rational multipliers. It seems that investors confused the reunification with a permanent supply side shock to the economy. By basing their investment decisions on this misjudgement, investors behaved irrationally, but in a very uncertain and unprecedented environment.

Date: 2010
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https://doi.org/10.1111/j.1468-0475.2009.00494.x

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