House Prices and Real Interest Rates in Spain

36 Pages Posted: 27 Dec 2006

See all articles by Juan Ayuso

Juan Ayuso

Banco de España

Roberto Blanco

Banco de España

Fernando Restoy

Banco de España

Date Written: December 27, 2006

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.

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

JEL Classification: E43, G12

Suggested Citation

Ayuso, Juan and Blanco, Roberto and Restoy, Fernando, House Prices and Real Interest Rates in Spain (December 27, 2006). Banco de Espana Research Paper No. OP-0608, Available at SSRN: https://ssrn.com/abstract=953756 or http://dx.doi.org/10.2139/ssrn.953756

Juan Ayuso (Contact Author)

Banco de España ( email )

Alcala 50
Servicio de Estudios
28014 Madrid
Spain
+34 91 338 5735 (Phone)
+34 91 338 5624 (Fax)

Roberto Blanco

Banco de España ( email )

Madrid 28014
Spain

Fernando Restoy

Banco de España ( email )

Madrid 28014
Spain
(34 91) 338 5119 (Phone)
(34 91) 338 5678 (Fax)

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