Paper published: Real Option Value over a Housing Market Cycle

The Journal of Regional Science and Urban Economics accepted a paper for publication, in which John Clapp, Piet Eichholtz and I research the ups and downs of the West Berlin housing market.

The goal of the paper is to single out the value that buyers and sellers attribute to the real option to extend the size of an existing house. We find that the possibility to add more space carries substantial value. Furthermore, we see that this value is highest in times of rising house prices (e. g. 1990-1994 in West Berlin) and disappears when house prices fall. The real options embedded in existing properties therefore significantly contribute to house price volatility.

Get the full paper here.

Villa Freundschaft Berlin Grünewald villa 1902
High and low option value properties in Berlin

Author: thies

Lecturer (Assistant Professor) for Real Estate Finance, Cambridge