The Construction of a Real Estate Confidence Index for the German Real Estate Market

Abstract

Already in the first half of the past century, cycle researchers found that expectations played a major role in the formation of business cycles. Based on this understanding, institutions in all industrialized countries developed business cycle surveys in order to identify the expecta-tions of market participants and to derive business cycle indicators from these data. Since most of the resulting indicators relate to the economy as a whole and since there is only a loose rela-tionship between the business cycle of the economy as a whole and the business cycle at an industry or company level, they are of limited value to decision makers in individual industries such as real estate. Only recently, researchers especially from the United States have started to construct real estate confidence indices for the projection of the real estate business cycle. The paper analyses the potential of constructing a real estate confidence index for the German real estate market as a new tool to forecast the real estate business cycle. International real estate related confidence indices are analysed and compared to proven sentiment indicators from other industries. Based on the findings of this analysis, an individual real estate confidence index approach is derived for the German real estate market. Finally, the paper provides a first frame-work for the implementation of this new approach and highlights its strengths and weaknesses.