Is there an Equilibrating Relationship between House Prices and Replacement Cost?

Emprirical Evidence from Berlin

Rainer Schulz, Axel Werwatz

    Research output: Contribution to journalArticle

    6 Citations (Scopus)

    Abstract

    It is a feature of competitive markets with forward-looking participants that a good’s benefit and its production cost are equalized in equilibrium and that no resources are wasted during the adjustment process. For housing markets, there is mixed evidence whether they meet this standard of allocative efficiency. Based on a unique data set with rich information on prices and cost, we examine the market for single-family houses in Germany’s capital Berlin. At the aggregate market level, we find that prices and cost tend to equalize in the long run. Short-run adjustment appears to be sufficiently fast and properly anticipated to prevent systematic excess profit opportunities. At the cross sectional level of individual houses, we find support that resources are allocated efficiently between different market segments. Taken together, our results provide sufficient evidence that the market in Berlin is efficient.

    Original languageEnglish
    Pages (from-to)288-302
    Number of pages15
    JournalJournal of Urban Economics
    Volume69
    Issue number3
    Early online date6 Jan 2011
    DOIs
    Publication statusPublished - May 2011

    Fingerprint

    Berlin
    market
    costs
    evidence
    allocative efficiency
    production costs
    housing market
    production cost
    resource
    cost
    resources
    profit
    price
    replacement cost
    Replacement cost
    House prices
    efficiency
    Resources
    Costs
    Market segments

    Keywords

    • Tobin's Q
    • housing market efficiency
    • real estate valuation

    Cite this

    Is there an Equilibrating Relationship between House Prices and Replacement Cost? Emprirical Evidence from Berlin. / Schulz, Rainer; Werwatz, Axel.

    In: Journal of Urban Economics, Vol. 69, No. 3, 05.2011, p. 288-302.

    Research output: Contribution to journalArticle

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