Correlation Between Debt Policy and Land Prices?

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By Dr. Reinhard Nacke, FPS Rechtsanwälte & Notare

The Swiss economists Reiner Eichenberger and David Stadelmann, both at the University of Fribourg, discussed some interesting theses in the "Neue Zürcher Zeitung" dated 23 January 2013 concerning the correlation between property prices and public bodies' unsound financial behaviour. When a municipality finances its disbursements with debt, this gives rise to higher liabilities in the future and a heavier financial burden due to upcoming interest and amortization payments.

As a result of the increased capital strain, the municipality must either save on costs by reducing benefits to its citizens, or raise taxes and contributions. In both cases, the downside is that the community becomes a less attractive place in which to live, and work. As real estate buyers observe price development and price behaviour, they anticipate lower property prices so that the effect occurs immediately and not in the future.

Eichenberger and Stadelmann confirmed their theoretical approach through their own empirical investigations in the Zurich area.

Furthermore, they found that the higher the rate of real estate ownership in the community, the more the municipality finances its expenditures with taxes rather than with debt. Hence, mainstream political parties, which generally represent landlords rather than tenants, are against higher debt, as opposed to more left-wing parties. If its adjacent bodies or the central government have to help the municipality settle its liabilities, real estate prices would not only decline locally, but also supra-locally due to high indebtedness, according to Eichenberger and Stadelmann. As people are much more mobile and flexible than in the past, and are also even willing to move abroad, an excessive debt policy can pull the real estate prices of the entire country down. In general, this means that "the higher the debt, the lower the property prices."

If this is correct, property prices would have to be relatively low in the USA, Japan, Spain, France and Germany compared to those in Switzerland, Luxembourg and the Scandinavian countries.


Dr. Reinhard Nacke, Partner
FPS Rechtsanwälte & Notare, Dusseldorf, Germany
T: +49 211 302 01 50
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FPS Rechtsanwälte und Notare is one of the largest fully independent German law firm with offices in Berlin, Dusseldorf, Frankfurt a. M. and Hamburg. FPS currently employs over 120 lawyers and notaries. One of the firm's core areas of expertise is the entire range of real estate law.

Dr. Reinhard Nacke is global Chairman of the GGI Real Estate Practice Group and currently works as partner of FPS in Dusseldorf. His areas of expertise are mainly corporate, M&A, real estate and tax law, very often in an international context. Among his clients are several global players from different continents.


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