A Statistical Evaluation of Possible Bubbles in the Price Development in the German Housing Market

Financial crises are often preceded by an asset market bubble or strong credit growth. To prevent further crises, it is essential to identify and combat excessive price and credit developments as early as possible. The momentum observed in the German housing market in recent years has led to concerns that a house price bubble already exists or still can emerge. However, a clear outcome is still missing. The present study analyses bubbles in the prices of owner-occupied flats in Germany by using the augmented Dickey-Fuller test and a generalized version of the sup augmented Dickey-Fuller test. A distinctive feature of the latter test is that it delivers a consistent date stamping strategy for the origination and termination of multiple bubbles. At first sight, there is evidence of so-called rational bubbles both in regional markets as well as in the overall German housing market. But most of them are linked to decreasing interest rates. Possibly, rational bubbles in seven German cities can be identified.