Real Estate Price Bubbles as Irrational Exuberance. A Critical Analysis of the German Real Estate Market

Bachelor Thesis , 2022 , 50 Pages , Grade: 1,3

Economy - Real estate industry

The development of real estate prices is of extraordinary importance for the financial and economic system, as undesirable developments could endanger financial stability, as seen in the subprime crisis, which eventually evolved into a global financial crisis. The same month the dot-com bubble burst, the Nobel Prize winner and current book author Robert J. Shiller published the non-fictional, bestselling first edition of his book, named "Irrational Exuberance", in which he explains his research on the occurrences and the causes of historical financial crises, while supplementing the conclusions with aspects of behavioural finance and social studies. As Shiller’s assertions are mainly based on the US market, research has been conducted to clarify whether his housing index and the concept of irrational exuberance can be applied to the German real estate market. By the detailed consideration of selected aspects of the book in connection with the conception of academic literature, this thesis finds that his ideas can principally be transferred to assess whether the German real estate market currently exhibits bubbly tendencies. This assessment is conducted, however, there are limitations in the sole consideration as an indicator as well as in the critical evaluation of the German real estate market.

Inhaltsverzeichnis (Table of Contents)

• 1 Introduction
• 1.1 Research problem
• 1.2 Course of investigation
• 2 German real estate market
• 2.1 Structure of the market
• 2.2 Real estate financing
• 2.3 Causes of the development of supply
• 2.4 Causes of the development of demand
• 3 Irrational Exuberance by Robert J. Shiller
• 3.1 About the author and his work
• 3.2 Speculative bubbles
• 3.3 Drivers of irrational exuberance
• 4 Discussion of the Case Shiller home price index
• 4.1 History of the development
• 4.2 The Case Shiller home price index
• 5 Application to the German real estate market
• 5.1 Applicability of the index and the concept of irrational exuberance
• 5.2 Irrational exuberance in Germany
• 5.3 Implications for the German real estate market
• 6 Conclusion
• 6.1 Summary
• 6.2 Critical acclaim
• 6.3 Outlook

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This bachelor's thesis examines the German real estate market and investigates whether the concept of "irrational exuberance," as presented by Robert J. Shiller, can be applied to this context. The thesis explores the potential for a real estate price bubble in Germany, drawing on Shiller's work and academic literature. Key themes explored in the thesis include:

• Real estate price bubbles and their potential impact on financial stability
• The application of behavioral finance and social studies to understand market trends
• The analysis of the German real estate market, considering its structure, financing, and supply and demand dynamics
• The concept of irrational exuberance and its potential influence on real estate prices
• The applicability of the Case-Shiller Home Price Index as an indicator for real estate price trends in Germany

Zusammenfassung der Kapitel (Chapter Summaries)

• Chapter 1: Introduction introduces the research problem of potential real estate price bubbles in Germany and outlines the course of investigation taken in the thesis. The chapter highlights the importance of understanding real estate price dynamics due to their potential impact on financial stability.
• Chapter 2: German Real Estate Market provides an overview of the German real estate market, examining its structure, financing mechanisms, and the factors driving supply and demand. This chapter provides context for the subsequent analysis of potential bubbles.
• Chapter 3: Irrational Exuberance by Robert J. Shiller introduces the work of Robert J. Shiller and his concept of "irrational exuberance," which explains the occurrence of speculative bubbles in financial markets. The chapter explores Shiller's arguments and the drivers of irrational exuberance.
• Chapter 4: Discussion of the Case Shiller Home Price Index examines the history and development of the Case-Shiller Home Price Index, a widely used indicator for real estate price trends. This chapter provides a framework for applying the index to the German context.
• Chapter 5: Application to the German Real Estate Market explores the applicability of the Case-Shiller Home Price Index and the concept of irrational exuberance to the German real estate market. It assesses whether the German market exhibits bubbly tendencies.

Schlüsselwörter (Keywords)

The core concepts and themes of this thesis revolve around the interplay between real estate market dynamics, financial stability, and behavioral finance. Key terms include: asset bubble, housing bubble, Robert Shiller, irrational exuberance, real estate market, behavioral finance, housing development Germany, monetary policy, and home price index. This focus highlights the research's interest in understanding the potential for price bubbles in the German context, drawing on the theories and concepts developed by Shiller and other scholars.

• College: Hamburg University of Applied Sciences
• Grade: 1,3
• Author: Luca Dominikat (Author)
• Publication Year: 2022
• Pages: 50
• Catalog Number: V1356000
• ISBN (PDF): 9783346874115
• ISBN (Book): 9783346874122
• Language: English
• Tags: asset bubble, housing bubble, robert shiller, irrational exuberance, real estate market, behavioural finance, housing development Germany, monetary policy, home price index