The cyclical behaviour of residential investment: some stylised facts

From the mid-1990s until the beginning of the latest recession a large number of the most advanced economies recorded a notable increase in residential investment, accompanied by sharp increases in house prices. These trends have come to an end in recent years, with a substantial adjustment in prices and volumes. Analysis of the housing market in Spain is of particular interest, given the dynamism of residential investment during the boom and the intensity of the subsequent correction. During the expansionary phase, housing investment grew at an average annual rate of more than 8% and, as a proportion of nominal GDP, it peaked in 2007 at 9.3%, somewhat more than five percentage points (pp) above its level in 1995 and well above the euro area and US levels . The strong growth in housing supply entailed a notable expansion of employment in construction, which as a share of total employment reached 13.8% in 2007, up almost 5 pp from 1996. Since 2008 residential investment has adjusted sharply and its importance in terms of GDP and employment has fallen rapidly. There are many interactions between housing market developments and the rest of the economy and these have been the subject of different analyses. Some authors have studied the extent to which house prices are consistent with their macroeconomic fundamentals (Ayuso and Restoy (2006)), while others have highlighted the role of non-financial wealth – practically all in the form of housing – as a determinant of household spending (L’Hotellerie and Sastre (2006)). The role of residential investment in the monetary transmission mechanism has also received detailed attention. Finally, general equilibrium models are increasingly being used that take into account specific features of the housing market (Rubio (2009)). From a different standpoint, Leamer (2007) has emphasised the importance of residential investment developments when analysing the business cycle. In fact, according to this author, eight of the last ten recessions in the United States were preceded by contractions in residential investment. This article, which is part of a broader joint research project with the central banks of Germany, France and Italy, analyses the nature of the cyclical fluctuations in the Spanish housing market over the period 1980-2008, in order to highlight a set of stylised facts. Following this introduction, the next section sets out the evidence available for housing investment as a leading indicator and, insofar as this is possible, it makes an international comparison. Afterwards, the possible existence of asymmetries in fluctuations in GDP and housing market variables is discussed, and finally the main conclusions are drawn.