A Novel Housing Price Misalignment Indicator for Germany

Abstract

From 2014 until present, housing prices in Germany have been rising faster than consumer prices in all quarters except one, raising concerns about an excessive overheating of the housing market. To assess the vulnerability of the German housing market to a future realignment of prices or even a housing bust, this paper develops a housing price misalignment indicator that is composed of seven indicators, which are commonly associated with the fundamental value of residential property. An empirical application to the most recent data suggests that the German housing market exhibits an overvaluation of approximately 11%, where interest rate risk and a relatively advanced stage of the housing cycle are identified as the main factors fueling these imbalances, while a rather solid debt‐servicing capacity mitigates these imbalances since end‐2009.

Konference doktorandů na Vysoké škole finanční a správní 2023: Prezentace výsledků společenskovědního výzkumu s ekonomickými a finančními efekty (10. ročník) = Doctoral Student Conference at the University of Finance and Administration 2023: Results presentation of social science research with economic and financial effects (10th annual conference)

“…From 2014 to 2019, real estate prices in Germany rose significantly faster than consumer prices, with the exception of a single quarter. As a result, concerns have arisen about excessive overheating of the real estate market (Hertrich, 2019). An empirical application during this data period subsequently outlined that the German real estate market is overvalued by about 11%.…”

“…The main factors that have driven this imbalance have been identified as interest rate risk and a relatively advanced stage of the real estate cycle, while a solid debt servicing capacity has mitigated these imbalances since late 2009 (Hertrich, 2019). Taking a closer look at these facts, it becomes clear that despite the "stabile lending" of the German banking sector, interest rate risk (among other factors) has led to an 11% overvaluation as of 2019.…”

“…The 2000s also saw increasing activity in the development of derivative instruments that can be used by asset managers to manage real estate risk (Fabozzi et al, 2009). Some experts speak of a fundamental stability that cannot be shaken by a change in interest rates (Voigtländer, 2013), and others have spoken of regionally overheated prices for many years (Hertrich, 2019). (Gischer & Weiß, 2007).…”

Land leverage and the housing market: Evidence from Germany

“…The feedback mechanism from housing investment to house prices is not estimated. Furthermore, a number of contributions seek to identify and quantify the degree of overvaluation by estimating a fundamental house price (Hertrich, 2019;Igan and Loungani, 2012;Kajuth, Knetsch and Pinkwart, 2016;Kholodilin and Ulbricht, 2015;Koetter and Poghosyan, 2010), or by deploying time-series methods (Chen and Funke, 2013;Kholodilin, Michelsen and Ulbricht, 2014). Their focus is more or less exclusively on the long-run determinants of German house prices without analysing the cyclical frequency.…”

The German Housing Market Cycle: Answers to FAQs

“…The feedback mechanism from housing investment to house prices is not estimated. Furthermore, a number of contributions seek to identify and quantify the degree of overvaluation by estimating a fundamental house price (Hertrich, 2019;Igan and Loungani, 2012;Kajuth, Knetsch and Pinkwart, 2016;Kholodilin and Ulbricht, 2015;Koetter and Poghosyan, 2010), or by deploying time-series methods (Chen and Funke, 2013;Kholodilin, Michelsen and Ulbricht, 2014). Their focus is more or less exclusively on the long-run determinants of German house prices without analysing the cyclical frequency.…”