Interaction between Housing and Financial Markets

Housing market combines the properties of consumption and investment good. The present paper is devoted to the empirical analysis of an interaction between housing and financial markets, and all results will be for Barcelona city as an area of research. We study the relationship between housing price index in Barcelona city and combined financial index, obtained as a mix between Barcelona and Madrid stock indices. In our previous research we have found the link between purchasing housing price, price of rent, income index and real interest. These factors explain substantial fraction of housing price variation. In the present paper we add financial index. First of all, the effect of this index on housing markets is small during the main part of observation period. Since we have several inteacting markets (housing for living, housing as investment), the effects of smaller are masked. Thus, financial index is a non-significant variable if we consider it together with rental price and income indices. But it becomes positively significant if taken alone. This means that financial and housing price indices were growing together in Barcelona. We also found a structural change in 1998: after this year, housing index correlates negatively with the financial index. The separate estimations for the period 1992-2003 have shown higher influence of financial markets on housing markets in comparison with the previous years.