Price Bubbles in Real Estate Markets and the Rebound Risk
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Real estate markets in continental Europe have seen quickly raising prices over the last years. Certainly, low interest rates and extensive credit supply have contributed therefore. As some practitioners fear comparable price cuts as after the subprime bubble in the US, most of the academic literature concentrates on the measurement of price bubbles. This paper, however, does not bring another model to analyze bubble determinants. It focuses on the rebound potential based on a set of data for Germany. While in some scenarios double-digit price cuts result, the majority of the simulations, which can be attributed to moderate increases in the interest rate, yield single-digit reductions. In other words, according to the actual market figures, a bursting German real estate “bubble” would set markets back, to where they were two or three years ago.
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