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The “housing bubble” and financial factors: Insights from a structural model of the French and Spanish residential markets

Listed author(s):
  • Antipa, P.
  • Lecat, R.

Over the last decade, France and Spain have experienced property price and residential investment increases which were among the strongest and the lengthiest in the euro area. Although the quality of the underlying data limits the precision of the estimates, the present paper aims at analysing the fundamental factors behind these evolutions. The analysis presented here assesses whether the observed price dynamics may be attributed to a pure expectation bubble phenomenon or to the large changes in financial and demographic factors. This is done by means of a structural model of the demand and supply sides of the housing market with an error-correction process. When taking into account a standard set of macroeconomic variables, our estimates imply that residential property prices in France and Spain were approximately 20% above the level explained by their fundamentals. When demographic and financial factors such as the borrowing capacity are taken on board, the degree of overvaluation is drastically reduced. The adjustment path to equilibrium is slightly faster in France than in Spain, but both countries display significant downward rigidity in prices.

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Paper provided by Banque de France in its series Working papers with number 267.

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Length: 47 pages
Date of creation: 2009
Handle: RePEc:bfr:banfra:267
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Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS

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