Price index for single-family homes in West Berlin

Next year, Berkeley’s Ashok Bardok, Bob Edelstein and Cynthia Kroll will publish an around-the-world analysis of the current housing crisis. Together with Piet Eichholtz, I had the honor to contribute a chapter on the big outlier in European housing markets: Germany. More on this soon.

In the meantime, I cannot refrain from publishing the first hedonic price index for single-family homes in West Berlin:

Home values take deep dive in West-Berlin
The blue line shows the prices for single-family homes in West Berlin, controlling for quality differences in the homes, while the red line represents home prices in real terms (without inflation). The dashed green line is the path of the Consumer Price Index (CPI).

Based on a data set of single-family homes we estimate a standard hedonic price equation spanning the years 1978 through 2007. The graph above suggests that the Berlin housing market has experienced roughly three phases for the 30 years covered by the index. The first period, between 1978 and 1989, can be characterized by steady growth. The average house price increase over this time period was 1.9 percent (corrected for inflation).

The exuberance in the aftermath of the fall of the Wall fueled price increases, peaking in 1994 with nominal prices being 47 percent above 1989 values. The average annual price increase for this period was 8.1 percent in nominal terms, and 4.6 percent in real terms.

In 1995, house prices decreased slightly followed by a much larger drop in 1996. In 2007, house prices were back at 1989 levels – in nominal terms. In real terms, however, prices had plummeted to 55 percent of their 1994 values, and 84 percent of their 1978 values. Such an extended period of price losses is unprecedented among European capitals (see figure below).

Berlin home prices compared to price dynamics in selected European capitals

Author: thies

Lecturer (Assistant Professor) for Real Estate Finance, Cambridge