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Article Excerpt
Abstract In connection with the housing market, which is presently raising a great deal of concern among the general public, this paper investigates regional housing prices in Spain using variable co-integration techniques. It analyzes the asymmetric behavior in real house prices among the Spanish regions focusing on the study of the long-term relationships over time. This paper raises an important question of the national averages masking important regional asymmetries. Results indicate evidence of co-integration, which suggests a broad grouping of regions based on physical proximity or similar economic characteristics.
Keywords House prices . Unit root * Co integration Long-run equilibrium * Convergence
JEL C10 * E00 * 050 * R10
Introduction
Housing development prices in most countries appears to be a topic of major interest. In fact, the purchase of a house is one of the assets that individuals most invest in. Macroeconomic factors in general, and particularly monetary conditions, are important determinants of the increase in the price of this asset. This is why the time series econometric analysis of housing prices has a relatively long history.
Some recent empirical studies on house price determination can be found, among others, in Iacoviello (2000), who uses a structural vector autoregressive (SVAR) approach to identify the main macroeconomic factors behind fluctuations in housing prices in six European countries, Girourard and Blondal (2001), who compare housing developments in OECD countries and examine how houses influence consumption and residential investment, Meen (2002), who compares the behavior of data on real house prices in the USA and UK, Annet (2005), who analyzes the European area with panel regressions of sub-groups of countries based on common institutional characteristics and plans short to medium run equations, Tsatsaronis and Zhu (2004), who apply a vector autoregressive (VAR) model for 17 countries around the world, grouped on their mortgage finance structures, Terrones and Otrok (2004), who analyze dynamic panel regressions for 18 countries, and OECD (2005), which relates the housing prices from the OECD countries and their underlying determinants. Furthermore, in relation to a single country Cook (2003) applies an asymmetric unit root test studying the ripple effect of regional UK housing prices, MacCarthy and Peach (2004) suggest demand and supply equations for the United States real estate market, Nagahata et al. (2004), contribute to the real estate market literature with a panel co integration analysis of Japan, as well as the following papers that used the error correction method, including Abelson et al. (2005) in Australia, OECD (2006) in Ireland, Oikarinen (2005) in Finland, Hofman (2005) in the Netherlands and Jacobsen and Naug (2005) in Norway.
Most of these papers have been concerned with explaining national housing prices. Nevertheless, there are also several studies based on regional house prices, due to increasing researcher interest in this topic; see among others, MacDonald and Taylor (1993). who model the dynamics of interregional housing prices in Great Britain, focusing on long-term equilibrium relationships and examining shorter-term dynamics, and Schnure (2005), who obtains panel estimations for regional housing prices and short-run specifications for US house prices.
This paper is also concerned with the behavior of regional housing prices. The reason for investigating regional housing prices stems partly from the importance that attributes them in the operating of regional labor markets, more specifically, concerning mobility. Spain has recorded the largest cumulative growth in housing prices of all OECD countries over the past ten years and, over an even longer period. Housing prices in real terms have risen drastically since the mid 1990s. In regard to Spain, there are also several papers related to housing prices and real estate market analysis. Garcia-Montalvo (2001), for example, revises the recent trend in Spanish housing prices and presents an econometric estimation, with panel data, of the factors that determine growth in prices; Martnez and Maza (2003) analyze house price determinants such as disposable income per inhabitant, interest rates, user cost, household borrowing and demographic variables among others; Sala (2004) studies how affordable houses are in different regions, depending on their prices, supply, characteristics and the housing policy practiced; Montanes and Clemente (2005) suggest a theoretical model able to grasp the evolution of housing prices as functions of a set of variables or factors with small size.
While a number of studies have sought to model aggregate indices for housing prices econometrically, as mentioned above, there appears to be little applied work on the dynamics of regional Spanish housing prices, despite how important the pattern of regional housing prices are, for example, in the case of the regional labor market and labor mobility decisions in Spain. In this sense, see Cancelo and Espasa (2000), who research the possibility of long-term market segmentation and analyze the short-term relationships between pairs of growth rates. Nevertheless, this paper aims to analyze the asymmetries that may exist in regional housing price trends in Spain by means of an in-depth study into the regional housing price time series. Our main question is whether there are in fact significant differences in the behavior of real housing prices among the 17 Spanish regions or whether asymmetries are not actually that large. In this sense, this paper first analyzes whether regional housing prices are tied together in long-term relationships over time. Finally, we study whether all pairs of regional housing prices behave asymmetrically.
The paper is structured as follows. The Trends in Regional House Prices section introduces some of the key data, showing how price trends differ among the Spanish regions. The Testing for Convergence section discusses and tests the hypothesis of convergence. In the section, Testing for Interregional Co Integration: Asymmetries in the Spanish Regional Trends, the results obtained from applying the co integration test allows us to analyze the asymmetries in regional trends and the Summary and Concluding Remarks section provides some concluding remarks.
Trends in Regional House Prices
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