The 'Housing Bubble' and Financial Factors: Insights from a Structural Model of the French and Spanish Residential Markets

47 Pages Posted: 18 Jun 2010

Date Written: December 2009

Abstract

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.

Keywords: House prices, Housing demand, Borrowing capacity, Residential Investment, Error correction model, Instrumental variables

JEL Classification: C32, E22, E27, R21, R31

Suggested Citation

Antipa, Pamfili M. and Lecat, Remy, The 'Housing Bubble' and Financial Factors: Insights from a Structural Model of the French and Spanish Residential Markets (December 2009). Banque de France Working Paper No. 267, Available at SSRN: https://ssrn.com/abstract=1625730 or http://dx.doi.org/10.2139/ssrn.1625730

Pamfili M. Antipa (Contact Author)

Banque de France ( email )

Paris
France

Remy Lecat

Banque de France ( email )

Paris
France

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