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Dynamics of Interest Rate and Spanish Housing Markets

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  • Yuri Yegorov

Abstract

The goal of this paper is to explain recent dynamics of housing prices in Spain. Two phenomena have been observed simultaneously: a signi cant decline in interest and mortgage rates and explosion of Spanish housing prices. Between 1998 and 2002 Spanish housing prices were growing well above in ation level, practically doubling during this period. The decline in interest rate should normally lead to a decline in housing prices, but in Spanish case it has correlated with growth of housing prices. The paper tries to explain the observed phenomenon with the decline of mortgage rate in the environment of local monopolies in housing construction. Contrary to US mortgage markets, which follow long-term rather than short-term interest rate path, Spanish banks o er mortgages at EURIBOR rate plus a small margin. This leads to a signi cant growth in mortgage accessibility for less wealthy agents, but in monopolistic environment is translated into rise of housing price for new construction. The prices of used housing also follow this path. Additional growth e ect comes from an increased demand for housing as nancial asset. There exists an evidence about signi cant purchases of second houses, partly for investment or speculative reasons. The paper constructs a theoretical model of housing prices taking into account all described phenomena.

Suggested Citation

  • Yuri Yegorov, 2003. "Dynamics of Interest Rate and Spanish Housing Markets," ERES eres2003_301, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2003_301
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    File URL: https://eres.architexturez.net/doc/oai-eres-id-eres2003-301
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    References listed on IDEAS

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    1. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
    2. Mercè Carreras-i-Solanas & Mascarilla-i-Miró Oscar & Yegorov Yuri, 2003. "Rental and Housing Markets in Barcelona," ERES eres2003_131, European Real Estate Society (ERES).
    3. Stiglitz, Joseph E, 1990. "Symposium on Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 13-18, Spring.
    4. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
    5. Chiarella, Carl & Dieci, Roberto & Gardini, Laura, 2002. "Speculative behaviour and complex asset price dynamics: a global analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 173-197, October.
    6. Hendershott, Patric H, 2000. "Property Asset Bubbles: Evidence from the Sydney Office Market," The Journal of Real Estate Finance and Economics, Springer, vol. 20(1), pages 67-81, January.
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    Cited by:

    1. Yuri Yegorov, 2011. "Migration as Driving Force for the Dynamics of Housing Rent," ERSA conference papers ersa11p49, European Regional Science Association.

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    More about this item

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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