House prices in Spain

Housing is the main asset of most households both in Spain and in many other developed countries. It is also the security for a significant part of the loans granted by Spanish deposit institutions. Consequently, through their effects on household consumption and investment decisions and on the financial position of households and financial institutions, changes in house prices have potential implications for the macroeconomic and financial stability of the Spanish economy. Real house prices in Spain have doubled over the last 25 years. As a proportion of average household income they have increased significantly, being among the highest in the developed countries. Between 1997 and 2002, the average price of appraised housing in Spain rose by 78%, and the latest official information for 2003 Q1 (an annual rate of increase of 17.5%) shows no sign of moderation in this growth, despite the economic downturn. However, it should be pointed out that GDP and employment continue to grow at positive rates (unlike, for example, in most of the euro area), that expectations regarding the continuation of this process are favourable, while interest rates on mortgage loans are holding at what are, in historical terms, notably low levels. These circumstances would seem to warrant asking how the recent behaviour of the price of housing in Spain relates to that of its basic determinants. Given the special characteristics of this real asset, which combines the properties of a consumer durable with those of an investment asset, there are a number of possible approaches to this analysis. This article summarises the results of two recent studies in this area carried out by the Research Department of the Banco de España, which take different approaches. Following this introduction, Section 2 summarises the results of the analysis of house prices in Spain carried out in Martínez and Maza (2003), which basically explores the nature of housing as a consumer durable. Under this approach (referred to below as the macroeconomic approach), the price of this real asset is essentially related to macroeconomic variables such as household disposable income and the cost of mortgage finance. Section 3 summarises the results of the alternative approach of Ayuso and Restoy (2003), which focuses on the financial properties of the housing asset (financial approach), analysing by means of a general asset pricing model the theoretical relationship between their price and the “dividends” they offer, whether in the form of rents or accommodation services. The main conclusions of the article are presented in Section 4.