House Prices and Real Interest Rates in Spain
36 Pages Posted: 27 Dec 2006
Date Written: December 27, 2006
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: Suggested Citation