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

Oliver Holtemöller and Schulz Rainer
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Schulz Rainer: University of Aberdeen,Aberdeen, United Kingdom of Great Britain and Northern Ireland

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

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.

Keywords: Berlin; rental housing market; small macroeconomic model (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1111/j.1468-0475.2009.00499.x

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