A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Michelsen, Claus; Weiß, Dominik Working Paper What Happened to the East German Housing Market? – A Historical Perspective on the Role of Public Funding – IWH Discussion Papers, No. 20/2009 Provided in Cooperation with: Halle Institute for Economic Research (IWH) – Member of the Leibniz Association Suggested Citation: Michelsen, Claus; Weiß, Dominik (2009) : What Happened to the East German Housing Market? – A Historical Perspective on the Role of Public Funding –, IWH Discussion Papers, No. 20/2009, Leibniz-Institut für Wirtschaftsforschung Halle (IWH), Halle (Saale), http://nbn-resolving.de/urn:nbn:de:101:1-20091222777 This Version is available at: http://hdl.handle.net/10419/37069 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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The views expressed herein do not necessarily represent those of the IWH. The papers repre- sent preliminary work and are circulated to encourage discussion with the authors. Cita- tion of the discussion papers should account for their provisional character; a revised version may be available directly from the authors. Comments and suggestions on the methods and results presented are welcome. IWH-Discussion Papers are indexed in RePEc-Econpapers and in ECONIS. Editor: Halle Institute for Economic Research – IWH Prof Dr Dr h. c. Ulrich Blum (President), Dr Hubert Gabrisch (Research Director) The IWH is a member of the Leibniz Association. Address: Kleine Maerkerstrasse 8, D-06108 Halle (Saale), Germany Postal Address: P.O. Box 11 03 61, D-06017 Halle (Saale), Germany Phone: +49 (0) 345 7753-60 Fax: + 49 (0) 345 7753-820 Internet: http://www.iwh-halle.de IWH-Discussion Papers 20/2009 2 __________________________________________________________________ IWH What Happened to the East German Housing Market? – A Historical Perspective on the Role of Public Funding – Abstract The paper analyses the development of the East German housing market after the reuni- fication of the former German Democratic Republic and the Federal Republic of Ger- many in 1990. We analyse the dynamics of the East German housing market within the framework of the well-known stock-flow model, proposed by DiPasquale and Wheaton. We show that the today observable disequilibrium to a large extend is caused by post- unification housing policy and its strong fiscal incentives to invest into the housing stock. Moreover, in line with the stylized empirical facts, we show that ‘hidden re- serves’ of the housing market were reactivated since the economy of East Germany be- came market organized. Since initial undersupply was overcome faster than politicians expected, the implemented fiscal stimuli were too strong. In contrast to the widespread opinion that outward migration caused the observable vacancies, this paper shows that not weakness of demand but supply side policies caused the observable disequilibrium. Keywords: housing market transition, housing subsidies, housing supply, East Germany JEL Classification: D5; H2; R21; R28; R31 IWH-Discussion Papers 20/2009 3 IWH __________________________________________________________________ What Happened to the East German Housing Market? – A Historical Perspective on the Role of Public Funding – Zusammenfassung Das vorliegende Papier analysiert die Entwicklungen auf dem ostdeutschen Wohnim- mobilienmarkt seit der deutschen Vereinigung im Jahr 1990. Zur Anwendung kommt dabei das weit verbreitete Modell von DiPasquale und Wheaton (1992). Dabei zeigt die theoretische Analyse in Übereinstimmung mit den empirischen Beobachtungen, dass ein erheblicher Teil des derzeit auftretenden Ungleichgewichts auf dem ostdeutschen Woh- nungsmarkt durch die umfängliche Förderpolitik in der Nachwendezeit verursacht wur- de. Allerdings können auch große Teile des heutigen Leerstands auf die Wohnungsbau- politik der DDR zurückgeführt werden. „Stille Reserven“ zur Wendezeit wurden mit dem Wechsel vom plan- zum marktwirtschaftlichen Wirtschaftssystem aktiviert. Der zur Wendezeit bestehende Wohnungsmangel wurde so schneller als von der Politik er- wartet überwunden. Entgegen der weitläufigen Meinung, die Leerstände wären in erster Linie durch Abwanderung nach Westdeutschland verursacht worden, kann eine Nach- frageschwäche für den Wohnungsmarkt in Gesamtostdeutschland nicht festgestellt wer- den. Vielmehr ist festzuhalten, dass die Entwicklungen auf der Angebotsseite zu den beobachtbaren Überhängen auf dem Wohnungsmarkt geführt haben. Schlagworte: Transformation des Immobilienmarkts, Subventionen für Immobilien, Wohnraumversorgung, Ostdeutschland JEL-Klassifikation: D5; H2; R21; R28; R31 IWH-Discussion Papers 20/2009 4 __________________________________________________________________ IWH What Happened to the East German Housing Market? – A Historical Perspective on the Role of Public Funding – 1 Introduction With the reunification of the two German states in 1990, politicians were faced with enormous challenges when combining two economic systems. In the aftermath of the reunification, thousands of residents of the former German Democratic Republic (GDR) migrated to the western part of Germany, in search of employment and economic pros- perity. In order to stop this large-scale emigration, politicians promised a fast process of con- vergence in standards of living between eastern and western parts of the country. Sev- eral instruments were implemented in the early 1990s, especially in the housing and construction sector to enhance the standard of living and to boost private investment. To overcome the scarcity of living space resulting from GDR housing policy numerous subsidies were introduced to stimulate construction of new homes and refurbishment of the existing housing stock. In the early 1990s, a sharp rise in housing-prices and com- pletion of newly constructed homes could be observed. Today, the housing sector in the former socialistic GDR is widely marked by high vacancy rates, on average around 14% and declining real-house-prices. Further, public subsidies for demolition aim to re- duce the existing housing stock by 350 000 units by 2010. Twenty years after the fall of the Iron Curtain, this paper presents a historically moti- vated review of the post-reunification housing policy, especially with regard to invest- ment incentives. In the paper, we argue that there is a path dependency in housing- policies, which roots in the housing policy of the former socialistic GDR and which strongly influences the spatial equilibrium in today’s housing market. Thereby ‘path de- pendencies’ are not understood analogous to the term commonly used in evolutionary economics (e.g. North 2000; Wetzel 2005). In a wider sense we argue that once a deci- sion in favor or against a certain housing policy option is made, the attributes of housing (especially durability) lead to processes that are difficult to reverse. We further argue that many decisions made in the early 1990s (caused by urgent problems) were indi- vidually rational for politicians but lacked in accuracy, which now cause the observable disequilibrium in the housing market. Figure 1 presents stylized facts on the dynamics of demand, supply, construction and prices in the East German housing sector. The presented data implies a subdivision of the East German housing market dynamics into three phases. In the early 1990s, the transition of the housing market from a planned to a market-based economy led to booming prices, followed by a sharp raise of construction activities with a time lag of approximately two years. From 1990 to 1993, prices rose about 10-15% on average. IWH-Discussion Papers 20/2009 5 IWH __________________________________________________________________