Structural breaks in the Spanish housing markets: Evidence from a spatial panel for the periof 1995-2010

In this paper we analyze the evolution of the Spanish housing market from 1995 to 2010. Between 1995 and 2007, the real estate market was a major driving force for the Spanish economy, with house prices increasing on average by over 10 percent per year. At the start of 2008, the year of the global financial crisis, the real estate sectorís contribution to Spainís GDP reached a remarkable 19 percent. However, the three years since 2008 have seen a very different situation, with the Spanish real estate sector severely depressed. This, as expected, has considerably affected the Spanish economy as a whole. Our intention is to identify the main factors that have determined the behavior of the Spanish housing market during the period 1995 to 2010 in order to shed some light on, and better understand, the strong relationship that exists between Spainís real estate sector and its economy. In order to do this, we pay special attention to the spatial aspects of the Spanish housing market. Consequently, following recent literature, we develop a theoretical dynamic framework for this market with a spatial perspective. Then we estimate the resulting long run relationship between housing prices and its determinants for the period 1995-2010. When doing this estimation, we proceed with a detailed panel unit root study for the data, consider the possible existence of structural breaks in the sampling period, and take into account data heterogeneity and cross-sectional dependence. Our results ratify the developed theoretical framework and suggest the existence of a spatial pattern in the data.