Euphoria and disillusionment: The collapse of Berlin's housing market.

Professor John Clapp (University of Connecticut) and I are currently working on a new version of our study on real option value in hedonic regression frameworks. In short: we suggest an improved index estimation technique which we apply on data from Berlin home sales. The paper is still very “pre-alpha”, but one result is so fascinating that I would like to share it already.

West-Berlin’s home values 1978-2007: prices in free fall.

(Hedonic index estimated on individual transaction data provided by Berlin’s Gutachterausschuß für Grundstückswerte. For a full discussion please see working paper.)

It does not come as a surprise that Berlin home values did perform well in the last years. The extend of the decline, however, is breath-taking: Berlin home values lost a staggering 46% in real terms since its all-time peak in 1993. If you know of any major city in the world that experienced a similar melt-down, please let me know.

The loss is even more severe against the background of strong real estate markets in most other European capitals. What went wrong in Berlin?

Berlin’s home values compared to selected European peers.

All prices are in nominal terms. Peers were selected on data availability. For sources → click here.