The Role of Fundamentals in the Price of Housing. Theory and Evidence
AbstractDespite the extensive research in the field of housing economics, the role of some â€˜fundamentalâ€™ economic variables, such as income, interest rates or stock of houses per capita, on the real price of housing is still not fully understood. In this paper we develop a dynamic general equilibrium model to micro-fundament the price of housing in a market without renting. In this framework we underline the dual role of housing both as a good that produces valuable services and as an investment asset that can be resold in a future date. To test the theoretical results obtained, we analyze the Spanish housing market from 1995 to 2006 as it seems to satisfy the theoretical assumptions in practice. We examine the extent to which real house prices at the regional level are driven by fundamentals by applying Panel Cointegration methods such as Common Correlated Effects, Dynamic Ordinary Least Squares and Vector Error Correction. Results are fully consistent with the theory and underline the importante of both long-run adjustment and persistence processes to explain the dynamic behaviour of prices.
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Bibliographic InfoPaper provided by BBVA Bank, Economic Research Department in its series Working Papers with number 0701.
Date of creation: Jul 2007
Date of revision:
Panel Cointegration; housing prices; adjustment dynamics; macroeconomic model;
Find related papers by JEL classification:
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
- R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
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