Housing supply and price reactions: A comparative approach between Spanish and Italian markets

Spain and Italy represent two of the most important Mediterranean Countries belonging to the European Union. Both Italian and Spanish property market have experienced a sustained period of growth since the mid of the 1990s and until 2008, followed by a rapid decline. Those countries are both facing, since 2008, the credit crunch which strongly hits the property market, and an economic crisis combined with a high rate of unemployment. At the same time, those two nations experienced different reactions to real estate market crisis, showed by a different change in real house price and number of transactions, different housing policies and planning regulations. This paper concerns house market boom and crisis from a supply perspective, and aims to add empirical evidence from those two markets to the literature on housing supply elasticity, as very little cross ““ country empirical evidence exists. Differences in supply responsiveness to prices are very important as they define how the housing market is responding to the variation of the quantity and quality of demand. Supply is also very important for prices volatility, economic stability and private investments in real estate. The paper means to estimate a new supply equation for Italian and Spanish markets, showing how price elasticity changes over different cycles, by means of data as house prices, cost of materials and labours in construction sector, interest rates, and house stocks. A pool EGLS method is used to account for cross-section heterokedasticity with fix effects in order to control space differences. The analysis has been developed at national as well as regional level for both countries, allowing the estimation of the variation in responsiveness of new housing supply to prices. The empirical approach shows differences and similarity in the two markets.