International Articles: The Rental Dynamics of the West German Market for Newly Built Apartments

By Cieleback, Marcus | Journal of Real Estate Literature, January 1, 2006 | Go to article overview

International Articles: The Rental Dynamics of the West German Market for Newly Built Apartments


Cieleback, Marcus, Journal of Real Estate Literature


Internationally, Germany has a low owner-occupation rate of approximately 43%. Therefore, the rented apartment sector is traditionally of great importance. Nevertheless, only a limited number of empirical studies for the German apartment sector exist. This study provides insight into the rental dynamics of the market for newly built apartments by examining the factors that influence rental change. The empirical results show that the real rental growth of newly built apartments is influenced by income growth, migration patterns and past growth in real construction costs. The results also support the assumption of a backward looking expectation formation process from the developers when applying for a building permit and the structurally higher rental growth rate in southern Germany.

(ProQuest: ... denotes formulae omitted.)

Introduction

Internationally, Germany has a low owner-occupation rate of approximately 43%. Therefore, the rented apartment sector is traditionally of great importance. Therefore, the factors affecting apartment rents and their movement are of interest for urban planners, developers, financing institutions and real estate professionals. Additionally, future demographic changes (Deutsche Bank, 2003a, 2003b) require a good understanding of the functioning of the rental apartment sector by developers and investors in order to deal effectively with the upcoming challenges. Nevertheless, only a limited number of empirical studies for the German residential sector exist.

This study provides insight into the functioning of the market for newly built apartments by examining the factors that influence real the rental change of newly built apartments in forty-four West German cities. In comparison to the existing research, the study uses time series data of a broad sample of West German cities to investigate the factors influencing real rental change to get a better understanding of this part of the German residential sector.

The rest of the paper is organized as follows. The next section reviews recent studies on the German residential sector and shows the differences of these studies from the approach taken in this paper. The section that follows describes the underlying model structure used for the estimation and the variable specification. This discussion is followed by the empirical results and their interpretations. The paper closes with concluding remarks.

Past Studies on the German Residential Sector

There are few empirical studies of the determinants of rents and prices in the German residential sector. One of the main reasons can be seen in the lack of reliable statistical information from official sources about rents and prices in the German real estate market. Nevertheless, two recent examples of studies are the working papers of Schultz and Werwatz (2001) and Hoffmann and Kurz (2002).

Schultz and Werwatz (2001) use a present value relation to derive a model that explains the formation and the movement of real estate prices. Based on this model, they come up with implicit hedonic prices for different characteristics of single-family houses in Berlin for the districts of Zehlendorf, Wilmersdorf, Steglitz and Charlottenburg in the south of Berlin. Hoffmann and Kurz (2002) use data from the German Socio-Economic Panel to perform hedonic analyses of housing rents.1 Based on their hedonic regression results, the authors compute different price indices to measure rent inflation. Comparing their results with the official rent index for West Germany for the period 1985 to 1998, they find that there is some evidence of an understatement of rent inflation in the official rent index for West Germany at the beginning of the 1990s whereas the difference in the adjacent periods is close to zero.

This paper takes a different approach from the two studies described by using times series data for a panel of forty-four West German cities. By using a panel approach, this study goes a step further than Dopfer (2001) who used time series analysis to model a rent index constructed from the rental data of thirty-nine West German cities. …

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