Dynamics of the German housing market

Abstract

This paper examines the development of German housing prices in light of the recent price increase of approximately 27% since 2010. Following an asset price approach, the actual rent-price ratio is compared to a ratio that will be calculated based on fundamental values which, according to theory, explain housing prices. Variables include housing and rental prices as well as mortgage and interest rates. The second part consists of a cointegration analysis on quarterly data from 1980Q1 to 2018Q4 where I test if housing prices inhibit a long-term relationship with rental prices. While the first analysis finds that the house price increase is explained, the result of the cointegration test suggests no stable long-run relationship between housing and rental prices in Germany.