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

DIW Weekly Report 6 / 2013, S. 16-23

Christian Dreger, Konstantin A. Kholodilin

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When speculative price bubbles on real estate markets burst, the effects for the real economy are often devastating taking the form of substantial losses in production and employment. This paper discusses the degree to which institutional frameworks can prevent speculative bubbles from emerging and expanding. Comparing experiences in different countries indicates that, in Germany, institutional regulations are more likely to counteract the risk of undesirable developments. Despite the recent substantial price increases, no speculative bubble can be identified in Germany so far-but the risk has increased. In times of the euro area debt crisis, real estate is regarded as a safe investment, which boosts demand. And although a reintroduction of the former subsidy for owner-occupied home purchases would create new housing space, it could also lead to price hikes in the property market. A particular problem is the banks' recent tendency to grant mortgages to households on the basis of lower and lower equity capital.

Konstantin A. Kholodilin

Research Associate in the Macroeconomics Department

Christian Dreger

Research Director in the Macroeconomics Department

JEL-Classification: C21;L93;R31
Keywords: Speculative bubbles, real estate market, fundamental development
Frei zugängliche Version: (econstor)