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.
- rental housing market
- small macroeconomic model
Holtemöller, O., & Schulz, R. (2010). Investor rationality and house price bubbles: Berlin and the German reunification. German Economic Review, 11(4), 465-486. https://doi.org/10.1111/j.1468-0475.2009.00494.x