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Leverage and bubbles: a note on the Spanish property market between 1998 and 2006

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  • Daniel Fuentes-Castro

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.

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  • Daniel Fuentes-Castro, 2011. "Leverage and bubbles: a note on the Spanish property market between 1998 and 2006," Applied Economics Letters, Taylor & Francis Journals, vol. 18(7), pages 693-695.
    • Handle: RePEc:taf:apeclt:v:18:y:2011:i:7:p:693-695
    DOI: 10.1080/13504851.2010.487821
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