July 13, 2012
That was the advice offered in 2009 by our former real estate analyst, Professor Tobias Just, with regard to the German housing market. Was it a valid forecast? Good call, Tobias! In each of the past two years, university towns – defined as towns with a very large percentage of students in the population – reported above-average price increases in the housing market. This statement applies both to east Germany and west Germany as well as to newbuild and existing stock.
What is the relationship between students and house prices?
While statements on a regional property market are invariably fraught with a sizeable amount of uncertainty because of the lack of comprehensive microdata, regional data and modern estimation methods do provide good indications of existing relationships. Our panel regressions suggest that when the focus is confined exclusively to the student share of the residential population this share correlates positively with average prices in Germany, but there is no causality involved. In multivariate analyses, though, the "student share" variable has either little explanatory power or none whatsoever. By contrast, labour market and purchasing power variables exhibit a large degree of explanatory power, overriding – so to speak – that of the student share.
Are there towns where students influence house prices?
To answer this question we categorised our data in homogeneous groups, with the similarity of the variables for house prices, purchasing power, labour market factors and the share of students defining the composition of the groups. The explanatory power evidenced in panel regressions of the student share for these groups of towns varied to a considerable degree. For medium-sized to large west German towns with a relatively small student population of 5% on average, house prices increase in line with the student share. By contrast, no relationship could be found for medium-sized towns in east Germany. A third group of towns, with the student share of the population averaging 15%, can be designated as "classic" university towns. This group includes, for example, Darmstadt, Heidelberg, Karlsruhe and Regensburg. These towns show a negative relationship between student share and house prices, i.e. the larger the share of students in the residential population, the lower the price of housing.
One possible explanation
Prices and demand for housing in a town with few students may possibly increase when the student population grows. But once the student share exceeds a certain level, the structure of the town's housing supply as a whole may change. Students' flexible living and working habits could curb the population's total demand for housing. The change in the structure of the housing supply thus induced could ultimately reduce the demand of families and older residents. They have good incomes on average and are therefore interested in higher-quality accommodation.
The role of purchasing power in "classic" university towns
In the "classic" university towns there is (at least at first glance) a positive relationship – or, to be more precise, a positive correlation – between the share of students and house prices. But if purchasing power is factored in, the cause-and-effect aspect – as described above – reverses, and the student share negatively impacts the price of housing. Typically, student purchasing power is below average relative to that of the town population as a whole, so it is not the reason for the change of polarity. Perhaps the very reason why people have sizeable purchasing power in these university towns is that business and academia there entertain very close ties, so well-educated students stay on in the respective university town after graduation and find a well-paying job. One further explanation could be soft factors, such as tourist attractions and cultural offerings. So in both explanatory approaches there is probably a third variable responsible for the rising prices that not only leads to a large student share, but also improves the purchasing power of the inhabitants.
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