What happened to the East German housing market? A historical perspective on the role of public funding

This article analyses the development of the East German housing market after reunification of the former German Democratic Republic and the Federal Republic of Germany 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 disequilibrium observable today is to a large extent caused by post-reunification housing policy and its strong fiscal incentives to invest in the housing stock. Moreover, in line with the stylised empirical facts we show that ‘hidden reserves’ of the housing market were reactivated since the economy of East Germany became market-organised. Since initial undersupply was overcome faster than politicians expected, the fiscal stimuli implemented were too strong. In contrast to the widespread opinion that outward migration caused the observable vacancies, this study shows that not weakness of demand but supply side policies caused the observable disequilibrium.