Abstract
Financial leverage means the debt taken to make a property investment is revalued in the same proportion as the speculative asset acquired. When the expected price rises above a certain threshold, it becomes rational to take on long-term debt to finance a short-term investment. This causes bubbles, which can have disastrous consequences for the economy as a whole. We model here the economics of speculative leverage and calculate the speculative threshold for the Spanish property market over the last decade, showing how far prices were above the mark.
Notes
1 The slope of FRt in EquationEquation 3(3) can be written as 1/(P 0 – M 0 + Rt + Ct ) (given EquationEquation 1(1)), where (M 0 – Rt ) is the outstanding principal payable.