El Clásico of Housing: Price Explosiveness in Madrid and Barcelona’s Real Estate Markets

This paper contributes to the literature on real estate market dynamics by analysing rental and sales price behaviour in Spain’s two largest cities —Madrid and Barcelona— between May 2007 and December 2024. Using monthly data from Idealista.com, Spain’s leading real estate platform, we detect episodes of explosive dynamics in both markets, examine their key determinants, and investigate contagion effects across cities and market segments. Our results show that, although relatively few episodes of price explosiveness occurred, they were of substantial duration. We also find evidence of contagion: explosive behaviour in rental markets precedes similar dynamics in sales prices, overall in recent years, highlighting the pivotal role of rental markets in driving housing price surges. Among the key determinants, a higher number of hotel stays is associated with a reduced probability of rapid housing price escalation, suggesting that more hotel-based tourists may help stabilise real estate markets in both cities. Additionally, rising interest rates are also linked to a lower risk of explosive episodes. In contrast, increasing resident numbers significantly raises the likelihood of a sharp housing price acceleration, whereas higher unemployment mitigates it. These findings offer critical insights for housing policy and market monitoring in major urban areas. Concretely, they suggest that housing policies should prioritise the rental market, not only because it impacts the most vulnerable groups, but also because pressures in the rental sector often extend into the sale market. On the other hand, policies that encourage the relocation of residents to areas with lower housing demand (e.g., improving the interurban transport network) or promote the issuance of housing certificates could help mitigate the risk of explosive housing price behaviour.