The burst of the US- real estate bubble in the year 2008 has contributed significantly to the global financial crisis, from which the global economy is still recovering from. In the US, housing prices collapsed after years of increase, which led to credit de-faults and the collapse of the banking system. The subprime crisis, however, was only the highlight of a great new set of consequential price bubbles on international real estate means, which could be seen to swap over to Spain as well as Ireland. This poses the question whether real estate bubbles might exist in Germany. The opinions of the nation are divided. The German city investigated particularly in this article is Munich, since prices are at an all-time high and have been rising continuously during the last decades. To be more specific, this master thesis aims to identify whether there is a local real estate bubble within the German city Munich. This is done by regressing two sets of data and using a stock-flow model in order to determine the relationship between housing prices and explanatory macroeconomic variables: The first set is a time series regression on a whole city perspective within the years 1975 and 2013. The second set is a panel data analysis on district basis within the years 2000 to 2012. Results suggest that in the first set condominium prices are moderately and rowhouse prices are slightly overvalued in Munich, especially in the recent years. The results of the second set illustrate an overvaluation of condominium prices on a slightly lesser level.
Table of contents
1 Introduction
2 Scope and limitations of research
2.1 Data collection techniques
2.2 Definition of a real estate bubble
2.3 Fundamental value - The stock-flow model
3 Literature Review
4 City based perspective from 1975 to 2013
4.1 Historical development
4.1.1 Population and labour market
4.1.2 Building and housing
4.1.3 Housing and renting prices
4.1.4 Interest rate and mortgages
4.2 Characteristic ratios
4.2.1 Price-to-rent ratio
4.2.2 Price-to-income ratio
4.2.3 Housing affordability index
4.3 Empirical time series analysis
4.3.1 The time series model
4.3.2 Statistical analysis
5 District based perspective from 2000 to 2012
5.1 District based investigation
5.1.1 Development of population in the districts
5.1.2 Development of building and housing in the districts
5.1.3 Development of housing prices in the districts
5.2 Empirical panel data analysis
5.2.1 The panel model
5.2.2 Cross section versus time series dimension
5.2.3 Statistical Analysis
5.3 Forecast
6 Conclusion, results, perspectives
Objectives and Research Themes
This master thesis investigates whether a local real estate bubble exists within the city of Munich. By utilizing two distinct empirical approaches—a time series analysis for the entire city (1975–2013) and a panel data analysis for its 25 official districts (2000–2012)—the study examines the relationship between housing prices and various macroeconomic variables to determine if current market prices are justified by fundamental values.
- Identification of local real estate bubbles in Munich.
- Evaluation of housing price developments using a stock-flow model.
- Analysis of city-wide historical factors from 1975 to 2013.
- Investigation of district-based demographic and pricing trends (2000–2012).
- Examination of market affordability via characteristic ratios (Price-to-Rent, Price-to-Income).
Excerpt from the Book
2.2 Definition of a real estate bubble
Since the comprehension of a real estate bubble is not quite clear, the definitions of leading articles have been compiled in order to give the reader a conception as well as an overview on the main aspects of pricing bubbles. This step is necessary in order to be able to answer the question whether a local real estate bubble exists within Munich. Here the article of Kajuth, F. et al. (2013) as well as the article of the Deutsche Bundesbank (2013a) monthly report of October 2013 is emphasized.
Even though, due to the latest developments in international real estate markets, the topic of bubbles might appear to be relatively young to some, history shows that pricing bubbles are not a recent phenomenon at all. One of the preeminent examples would be the Dutch tulip pricing bubble, which took place between the years 1634 – 1637. During that time, tulip bulps became enormously popular and, due to a lack of supply, prices increased dramatically. The bubble finally burst, and the price of tulip bulps collapsed. Garber (1990, p. 37) calls this bubble “one of the most famous” bubbles.
The literature identifies essentially two different kinds of pricing bubbles: The rational and the irrational bubble. But the terms “rational” and “irrational” do not account to describe the bubble itself; they rather describe the actions of market participants in terms of behavior and expectation. If investors choose to make rational decisions, and hence a bubble develops, the result is a rational bubble. In this case the rationality of market participants does not imply that the price of an asset has to be equal to its fundamental value. In theory in an efficient market, the rational equilibrium price of any asset of today is the equal to the future expected sum of discounted cashflows. But since it is uncertain how future cashflows develop, in case of a rational bubble, investors are willing to pay higher prices for assets, because, according to their rational expectation, a higher price increase in the future is projected.
Summary of Chapters
1 Introduction: Introduces the topic of real estate bubbles globally and in Germany, establishing the focus on Munich and defining the core research questions.
2 Scope and limitations of research: Describes the methodology for data collection and provides theoretical frameworks, including the definition of housing bubbles and the stock-flow model.
3 Literature Review: Synthesizes existing academic and financial literature regarding real estate market analysis in Germany and previous studies on housing bubbles.
4 City based perspective from 1975 to 2013: Examines historical factors and calculates characteristic ratios for Munich, concluding with an empirical time series analysis to estimate fundamental values.
5 District based perspective from 2000 to 2012: Provides a granular analysis of Munich's 25 districts using panel data and statistical models to assess local housing price deviations.
6 Conclusion, results, perspectives: Summarizes the thesis findings, confirming a prominent overvaluation of condominium prices in Munich and offering an outlook on future market developments.
Keywords
Real estate bubble, housing bubble, fundamental value, fundamental house prices, stock-flow model, price development, Munich, regression analysis, panel data, condominium, rowhouse, affordability index, price-to-rent ratio, price-to-income ratio, macroeconomic variables.
Frequently Asked Questions
What is the primary objective of this thesis?
The primary objective is to investigate whether a local real estate bubble exists in Munich by analyzing whether housing prices deviate from their calculated fundamental values.
What are the central themes discussed in the research?
The research focuses on real estate market dynamics, price developments, demographic changes, and the impact of macroeconomic variables like interest rates and income on housing affordability.
Which scientific methods are employed?
The author uses a stock-flow model combined with OLS time series regressions (for city-wide data) and panel data analysis (for district-level data) to determine fundamental housing values.
What does the main body of the work cover?
It covers a historical overview of Munich's housing market since 1975, a detailed analysis of its 25 administrative districts since 2000, and an econometric investigation of price drivers.
How is a "real estate bubble" defined in this study?
A bubble is identified when the actual market value of properties significantly exceeds the calculated fundamental value, where economic factors no longer justify the current price levels.
Which key indicators are used to evaluate market health?
Key indicators include the price-to-rent ratio, the price-to-income ratio, and a housing affordability index.
What is the conclusion regarding condominium prices in Munich?
The study concludes that there is a prominent overvaluation of condominium prices in Munich, providing a substantial basis for the existence of a local housing bubble.
Does the thesis find the same results for rowhouses?
No, the overvaluation detected for rowhouses is comparatively slighter than that found for condominiums, suggesting the market is less heated in that segment.
- Arbeit zitieren
- Florian Rühlemann (Autor:in), 2014, Are properties in Munich partially overvalued? An investigation of local real estate bubbles and price development within the districts, München, GRIN Verlag, https://www.grin.com/document/277647
