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A Cross-Section Analysis of the Income Elasticity of Housing Demand in Spain: Is There a Real Estate Bubble?

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  • Daniel Fernández-Kranz

    ()

  • Mark Hon

    ()

Abstract

Much attention has been given to claims that real estate prices in Spain are overvalued in relation to income and how plummeting house prices can jeopardize the economy (The Economist, 2003 and IMF, 2004). The measure of income elasticity on housing expenditure is often of considerable interest to applied researchers and policy makers in real estate economics, but the problem of omitted variables in some estimation techniques can lead to severe biases. In this paper we estimate the income elasticity of the demand for housing in Spain based on the cross-section of prices and income in fifty Spanish provinces from 1996 to 2002. In comparison to long-run equilibrium models fitted with time-series data, our results show a much weaker role of income growth as a vehicle for house price increases in the long run. According to our estimates, the rate of growth of house prices in Spain between 1998 and 2003 points to a real estate bubble with prices above the long-term equilibrium level. Copyright Springer Science + Business Media, LLC 2006

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File URL: http://hdl.handle.net/10.1007/s11146-006-6962-9
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Bibliographic Info

Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

Volume (Year): 32 (2006)
Issue (Month): 4 (June)
Pages: 449-470

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Handle: RePEc:kap:jrefec:v:32:y:2006:i:4:p:449-470

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Web page: http://www.springerlink.com/link.asp?id=102945

Related research

Keywords: Income elasticity; Cross-section; Housing expenditure; R20; E21;

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References

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  1. Arcelus, Francisco & Meltzer, Allan H, 1973. "The Markets for Housing and Housing Services: Reply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(4), pages 973-78, November.
  2. Lopez, Carmen & Aguayo, Eva & Exposito, Pilar, 1998. "El comportamiento de los precios de la vivienda en las regiones españolas: principales determinantes," Economic Development 34, University of Santiago de Compostela. Faculty of Economics and Business. Econometrics..
  3. Goodman, Allen C. & Kawai, Masahiro, 1986. "Functional form, sample selection, and housing demand," Journal of Urban Economics, Elsevier, vol. 20(2), pages 155-167, September.
  4. Mayo, Stephen K., 1981. "Theory and estimation in the economics of housing demand," Journal of Urban Economics, Elsevier, vol. 10(1), pages 95-116, July.
  5. Justo Manrique & Kalu Ojah, 2003. "The demand for housing in Spain: an endogenous switching regression analysis," Applied Economics, Taylor and Francis Journals, vol. 35(3), pages 323-336.
  6. Hansen, Julia L. & Formby, John P. & Smith, W. James, 1996. "The Income Elasticity of Demand for Housing: Evidence from Concentration Curves," Journal of Urban Economics, Elsevier, vol. 39(2), pages 173-192, March.
  7. Kim, Kyung-Hwan & Suh, Seoung Hwan, 1993. "Speculation and Price Bubbles in the Korean and Japanese Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 6(1), pages 73-87, January.
  8. Juan Ayuso & Fernando Restoy, 2003. "House prices and rents: an equilibrium asset pricing approach," Banco de España Working Papers 0304, Banco de España.
  9. Arcelus, Francisco & Meltzer, Allan H, 1973. "The Markets for Housing and Housing Services," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 78-99, Part I Fe.
  10. Polinsky, A Mitchell, 1977. "The Demand for Housing: A Study in Specification and Grouping," Econometrica, Econometric Society, vol. 45(2), pages 447-61, March.
  11. Wilkinson, R K, 1973. "The Income Elasticity of Demand for Housing," Oxford Economic Papers, Oxford University Press, vol. 25(3), pages 361-77, November.
  12. Goodman, Allen C. & Kawai, Masahiro, 1982. "Permanent income, hedonic prices, and demand for housing: New evidence," Journal of Urban Economics, Elsevier, vol. 12(2), pages 214-237, September.
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Citations

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Cited by:
  1. Arghyrou, Michael G. & Gadea, Maria Dolores, 2012. "The single monetary policy and domestic macro-fundamentals: Evidence from Spain," Journal of Policy Modeling, Elsevier, vol. 34(1), pages 16-34.
  2. Arghyrou, Michael G. & Gregoriou, Andros & Kontonikas, Alexandros, 2009. "Do real interest rates converge? Evidence from the European union," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(3), pages 447-460, July.
  3. Belke, Ansgar & Gros, Daniel, 2007. "Instability of the Eurozone? On Monetary Policy, House Prices and Labor Market Reforms," IZA Discussion Papers 2547, Institute for the Study of Labor (IZA).
  4. Carlos Rodríguez & Ricardo Bustillo, 2010. "Modelling Foreign Real Estate Investment: The Spanish Case," The Journal of Real Estate Finance and Economics, Springer, vol. 41(3), pages 354-367, October.
  5. David Downs & Z. Güner, 2012. "Information Producers and Valuation: Evidence from Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 44(1), pages 167-183, January.

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