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House prices and real interest rates in Spain

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  • Juan Ayuso

    ()
    (Banco de España)

  • Roberto Blanco

    ()
    (Banco de España)

  • Fernando Restoy

    ()
    (Banco de España)

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    Abstract

    This paper analyses the contribution of interest rates to explain recent house price developments in Spain trying to reconcile different pieces of evidence. On the one hand, empirical evidence supports the view that interest rates are a key variable to explain house price developments. As a matter of fact, using simple asset pricing relations recent changes in house prices could be fully explained by movements in ex-post real interest rates. However, more refined asset pricing models show that the changes in the discount factor cannot fully explain the recent course of house prices in Spain. To resolve this puzzle we provide evidence that shows that the actual real cost of financing might have decreased significantly less than what the course of ex-post real rates would suggest.

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosOcasionales/06/Fic/do0608e.pdf
    File Function: First version, MDecember 2006
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    Bibliographic Info

    Paper provided by Banco de Espa�a in its series Banco de Espa�a Occasional Papers with number 0608.

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    Length: 36 pages
    Date of creation: Dec 2006
    Date of revision:
    Handle: RePEc:bde:opaper:0608

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    Web page: http://www.bde.es/
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    Related research

    Keywords: house prices; real interest rates; intertemporal marginal rate of substitution; stochastic discount factor;

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    References

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    1. John Y. Campbell, 1992. "Intertemporal Asset Pricing Without Consumption Data," NBER Working Papers 3989, National Bureau of Economic Research, Inc.
    2. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-62, April.
    3. Poterba, James M, 1984. "Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 729-52, November.
    4. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
    5. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    6. David Genesove & Christopher Mayer, 2001. "Loss Aversion And Seller Behavior: Evidence From The Housing Market," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1233-1260, November.
    7. François Ortalo-Magné & Sven Rady, 2002. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," Wisconsin-Madison CULER working papers 02-01, University of Wisconsin Center for Urban Land Economic Research.
    8. Rodriguez, Rosa & Restoy, Fernando & Pena, J. Ignacio, 2002. "Can output explain the predictability and volatility of stock returns?," Journal of International Money and Finance, Elsevier, vol. 21(2), pages 163-182, April.
    9. Gali, Jordi, 1994. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice, and Asset Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 1-8, February.
    10. Fran�ois Ortalo-Magné & Sven Rady, 2006. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints ," Review of Economic Studies, Oxford University Press, vol. 73(2), pages 459-485.
    11. Karl E. Case & Robert J. Shiller, 1988. "The Efficiency of the Market for Single-Family Homes," NBER Working Papers 2506, National Bureau of Economic Research, Inc.
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    13. Fernando Restoy & Philippe Weil, 1998. "Approximate Equilibrium Asset Prices," NBER Working Papers 6611, National Bureau of Economic Research, Inc.
    14. DiPasquale Denise & Wheaton William C., 1994. "Housing Market Dynamics and the Future of Housing Prices," Journal of Urban Economics, Elsevier, vol. 35(1), pages 1-27, January.
    15. Ricardo Gimeno & Carmen Martínez-Carrascal, 2006. "The interaction between house prices and loans for house purchase. The Spanish case," Banco de Espa�a Working Papers 0605, Banco de Espa�a.
    16. Flood, Robert P. & Rose, Andrew K., 2005. "Estimating the expected marginal rate of substitution: A systematic exploitation of idiosyncratic risk," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 951-969, July.
    17. Ayuso, Juan & Restoy, Fernando, 2006. "House prices and rents: An equilibrium asset pricing approach," Journal of Empirical Finance, Elsevier, vol. 13(3), pages 371-388, June.
    18. N. Gregory Mankiw & David N. Weil, 1988. "The Baby Boom, The Baby Bust, and the Housing Market," NBER Working Papers 2794, National Bureau of Economic Research, Inc.
    19. Kenny, Geoff, 2003. "Asymmetric adjustment costs and the dynamics of housing supply," Economic Modelling, Elsevier, vol. 20(6), pages 1097-1111, December.
    20. Jim Clayton, 1996. "Rational Expectations, Market Fundamentals and Housing Price Volatility," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(4), pages 441-470.
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    Cited by:
    1. José Francisco Bellod Redondo, 2011. "Detección de burbujas inmobiliarias: el caso español," Contribuciones a la Economía, Grupo Eumed.net (Universidad de Málaga), issue 2011-05, May.

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