Investor rationality and house price bubbles: Berlin and the German reunification

Oliver Holtemöller, Rainer Schulz

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    2 Citations (Scopus)

    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.
    Original languageEnglish
    Pages (from-to)465-486
    Number of pages22
    JournalGerman Economic Review
    Volume11
    Issue number4
    Early online date23 Nov 2009
    DOIs
    Publication statusPublished - Nov 2010

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    Keywords

    • Berlin
    • rental housing market
    • small macroeconomic model

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