Real Estate Booms and Price Bubbles: What Can Germany Learn from Other Countries?

When speculative price bubbles on real estate markets burst, the results are often distortions in the real economy, associated with substantial losses in production and employment. This paper discusses the degree to which institutional frameworks can prevent speculative bubbles from forming and expanding. Comparing experiences in different countries, it shows that in Germany institutional regulations are more likely to counteract the risk of undesirable developments. Despite recent price rises, no speculative bubble can currently be identified in Germany- but the danger has increased. In times of debt crisis, real estate is regarded as a safe investment, which boosts demand. And although reintroducing Germany's former subsidy for owner-occupied home purchases would create new housing space, it could also fuel price rises in the property market. A particular problem is the banks' recent tendency to grant mortgages to households on the basis of lower and lower deposits.