The Spanish housing market: is it fundamentally broken?

ABSTRACT

This paper aims to investigate the relationship between housing prices and their main fundamental determinants using the example of Spain and considering the possibility of structural breaks in the relationship. We find that the cointegrating coefficient estimates are quite unstable over 2001Q1-2017Q4 and need to be estimated for different subperiods. Specifically we find that the main long-run fundamentals explain the behaviour of equilibrium house prices well during the boom-bust period. However, only corporate profit, or capital income, seems to explain the evolution after the recovery from the recession.

KEYWORDS:

• House prices
• capital income
• wage income
• DOLS
• structural breaks
• crisis

JEL CLASSIFICATION:

• E21
• E51
• R20

Acknowledgments

The authors gratefully acknowledge comments by an anonymous referee. The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank, the European Central Bank or the Eurosystem.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ http://www.registradores.org/wp-content/estadisticas/propiedad/eri/ERI_Anuario_2017.pdf, p. 60.

² Real Decreto-ley 7/2019, de 1 de marzo. Available in Spanish at: https://www.boe.es/buscar/doc.php?id=BOE-A-2019-3108.

³ Gross operating surplus and mixed income as defined by Eurostat. https://ec.europa.eu/eurostat/web/products-datasets/-/tec00015.

⁴ The number of dwellings has been transformed from annual to quarterly observations assuming the same value in all quarters within the year.

⁵ The results of the unit root tests are available on request.

⁶ Juselius and McDonald (2004) and Juselius and Toro (2005) amongst others suggest that the addition of variables to a cointegrating relationship would not change that relationship, since the stochastic trends have already cancelled out.

⁷ The results of the tests are available upon request.

Additional information

Funding

This work was supported by the Agencia Estatal De Investigación, Ministerio de Economía, Industria y Competitividad y Fondo Europeo de Desarrollo Regional [ECO2017-83255-C3-3-P, ECO2017-85503-R].