The main question which results through the theme is: “Are German real estates overvalued or can the development on the market be explained by macro-economic factors?”
To be able to answer this question it is necessary to firstly define what a bubble is and further analyze general criteria which can lead to it.
After that an analyzation of possible indicators which are linked to the two largest housing bubbles: the The Subprime Crisis in in the USA of the former decade and the housing bubble in Japan in the middle of the 90s will be done and a comparison of those crises will be given.
Based on those findings the development of the current real estate situation of Germany and an overall evaluation of possible legal and political instruments which are supposed to protect from a pricing bubble will be done.
The findings are based on literature review and include an empirical part with expert interviews when it comes to the risk of having a housing bubble specifically in Germany.
Table of Contents
1 INTRODUCTION
1.1 PROBLEM STATEMENT
1.2 GOAL SETTING AND QUESTION OF RESEARCH
1.3 STRUCTURE AND PROCEDURE
2 THEORETICAL REFERENCE FRAME
2.1 PRICE FORMATION ON THE REAL ESTATE MARKET
2.2 DEFINITION OF PRICE BUBBLE
2.3 REASONS BEHIND A PRICE BUBBLE
2.3.1 Real Economic Terms
2.3.2 Fiscal Terms
2.3.3 Behavior Based Reasons
Limited Rationality
Greater-Fool
2.3.3.1 Institutionalization/ Herd instinct
2.4 CONSTRUCTION SCHEME OF A REAL ESTATE BUBBLE
2.4.1 Displacement
2.4.2 Boom
2.4.3 Euphoria
2.4.4 Profit Taking
2.4.5 Panic
2.5 INDICATORS OF A REAL ESTATE BUBBLE
2.5.1 Absolute/Relative Price Development
2.5.2 Price-Rent-Relation
2.5.3 Price-Income-Indicator
2.5.4 Fundamentally Justified Price
2.6 CONSEQUENCES OF A REAL ESTATE BUBBLE
3 HOUSING BUBBLES IN THE PAST
3.1 SUBPRIME CRISIS USA
3.2 JAPAN CRISIS
4 ANALYSIS OF THE GERMAN MARKET
4.1 GENERAL INDICATORS
4.1.1 Development of the Demand
4.1.1.1 Population Growth
4.1.1.2 Household and age structure
4.1.2 Development of the Supply
4.1.3 Implications for the financial system
4.1.4 Bank Landing in Germany
4.2 KEY FIGURE ANALYSIS
4.2.1 Price-Rent Ratio
4.2.2 Price-Income Ratio
4.2.3 Tobin q
4.3 FURTHER INDICATORS
4.3.1 Inheritance
4.3.2 Foreign Investors
4.4 INTERPRETATION OF THE FINDINGS
5 CONCLUSION
6 OUTLOOK
Research Objectives and Themes
This thesis examines the current state of the German real estate market to determine if there is an existing price bubble, specifically investigating whether price increases are driven by speculative behavior or underlying macroeconomic factors.
- Theoretical definitions of real estate bubbles and their construction phases.
- Analysis of historical bubbles, including the US Subprime crisis and the Japan crisis.
- Empirical analysis of the German residential real estate market using demand and supply indicators.
- Evaluation of key figures such as price-rent ratios, price-income ratios, and Tobin q.
- Assessment of external influences like foreign investment and demographic shifts on German property prices.
Excerpt from the Book
2.3.3 Behavior Based Reasons
The efficient market hypothesis assumes that if there is a market in which the participants have the overall knowledge about it and act rationally, a speculative bubble should be excluded. The price should only be formed by the logically expected incomes of an asset. Nevertheless, even in experimental markets (no uncertainty: conditions for participants to determine the intrinsic value of an asset easily) a development of price bubbles can be detected. Why does the behavior of the market participants differ from the efficient market hypothesis? The following theories explain those behavior-based reasons.
Limited Rationality: One of the explanatory approaches sees the limited rationality of the human being as one factor due to which market participants can’t fully collect and interpret all relevant information of the market. This should normally only lead to a short-term discrepancy to the intrinsic value. The learning-process of the participants should ensure that the assets get priced realistically again and reduce an overvaluation medium-term and long-term (REF. SIMON,1955, P. 114).
Greater-Fool: The “Greater-Fool-Theory” implies that there is always a buyer in the market who is ready to pay more for an asset. Based on that consideration investors might buy assets which are already above their internist values with the motivation to sell those more expensive. Therefore, they might overestimate their ability of evaluating asset prices. The overestimation of the price rises until no „greater fool“ can be found, leading to a rapid price correction. The investors who bought the assets right before the price correction are those who realize the loss (REF. LEVINE AND ZAJAC, 2007, P. 2 F.).
Summary of Chapters
1 INTRODUCTION: This chapter establishes the background of the research, states the problem regarding rising real estate prices in Germany, and defines the research question.
2 THEORETICAL REFERENCE FRAME: Provides a scientific framework for defining a "real estate bubble" and outlines the various economic and behavioral reasons that can lead to speculative price surges.
3 HOUSING BUBBLES IN THE PAST: Analyzes the emergence and eventual collapse of the Subprime crisis in the USA and the Japan crisis in the 1990s as historical case studies.
4 ANALYSIS OF THE GERMAN MARKET: Conducts an empirical investigation of the German market, applying indicators like demand development, key financial figures, and external drivers to current data.
5 CONCLUSION: Summarizes the study's findings, concluding that while certain risks exist, there is no conclusive evidence of a speculative bubble in the German real estate market as a whole.
6 OUTLOOK: Discusses the future development of the German real estate market in light of current interest rate levels and financing conditions.
Keywords
Real Estate, Price Bubble, Germany, Macroeconomic Factors, Speculation, Subprime Crisis, Japan Crisis, Housing Market, Financial Stability, Price-Rent Ratio, Price-Income Ratio, Tobin q, Interest Rates, Demographic Change, Lending Standards.
Frequently Asked Questions
What is the core focus of this research?
The research focuses on investigating whether the German real estate market is currently experiencing a speculative price bubble or if price increases are fundamentally justified by macroeconomic factors.
What are the primary thematic areas covered?
The work covers theoretical models of bubble formation, historical crisis analysis, empirical examination of the German market, and various indicators for identifying market exaggerations.
What is the main research question of this work?
The main question is: “Are German real estates overvalued or can the development on the market be explained by macro-economic factors?”
Which scientific methodology is utilized in this study?
The study utilizes a two-part methodology: an analysis based on theoretical foundations and a supplementary empirical, statistic time-series analysis of the German real estate market.
What topics are discussed in the main part of the thesis?
The main part covers the theoretical framework of bubble identification, lessons from the US and Japanese housing crises, and a deep dive into the German market using indicators such as demand, supply, price-rent ratios, and inheritance impacts.
Which keywords characterize this paper?
The paper is characterized by terms such as Real Estate, Price Bubble, Germany, Macroeconomic Factors, Speculation, Financial Stability, and Tobin q.
How do German lending standards compare to the US?
Unlike the US, Germany has a "fixed-interest culture" and significantly more conservative loan-to-value ratios, which provide a significant hedge against a real estate market collapse.
What conclusion does the author reach regarding the German market?
The author concludes that while there are signs of euphoria in certain metropolitan areas, there is no speculative exaggeration at the national level, and the price growth is supported by fundamental factors.
Why are demographic trends considered important in this analysis?
Demographic trends, such as population growth and the shifting household structure towards smaller units, are identified as fundamental drivers of the sustained high demand for housing in Germany.
What role does inheritance play in the current real estate market?
Inheritance is identified as a new source of capital for the market, as heirs can use inherited financial assets to increase their equity, thereby simplifying real estate financing.
- Quote paper
- Valonita Berisha (Author), 2019, Real Estate in Germany. Boom or Bubble?, Munich, GRIN Verlag, https://www.grin.com/document/510370
