Bargain or Bust? Prices, Discounts, and Returns in Berlin's Real Estate Foreclosure Market

This paper investigates foreclosure discounts and their impact on property appreciation rates in Berlin's housing market from 1984 to 2022. Utilizing a comprehensive dataset of 391,420 transactions, we document substantial foreclosure discounts ranging from 20 to 50 percent, linked to regional business cycles and displaying modest variations between East and West Berlin. Employing hedonic regressions and repeat sales analysis, we find that foreclosed properties in later transactions yield excess returns, with appreciation rates 20.5 percentage points higher than matched non-distressed properties. Conversely, properties auctioned off in foreclosures underperform by 9.6 percentage points. Importantly, the analysis reveals that foreclosure effects are primarily transaction-specific, with no long-term stigma on properties. Our findings highlight the role of Germany's auction format in shaping discounts, suggesting that institutional investors achieve higher returns due to superior expertise. These results underscore the need for policy reforms to enhance auction transparency and competition, offering insights into market design and efficiency in distressed property markets.