Personal Research Project
 

A Bubble about to burst? The Spanish Real Estate Market
 

Lecture: Spanish Economy
Winter Term 2006/2007

Nils-Hendrik Klann

31st of January 2007

Contents

1. Introduction ...3

2. Real Estate Markets & Price Bubbles ...4

3. Demand and Price Evolution for Spanish Real Estate ...8

4. Conclusion ...13

A. Figures & Tables ...14

1. Introduction

When real estate prices in Spain rose roughly around 160 per cent in the period of 1998 until 2004 [GVM05, S. 9] the country ultimately joined the group of economies currently perceived to be threatened by a real estate bubble. Comparing the increases of home prices from 1997 until 2005 places Spain third behind Ireland and Britain which experienced a similar surge in house prices.¹ [Eco05] Curently property bubbles receive a good deal of attention since major economies like the USA and UK all appear to be threatened by this process.

This paper discusses the phenomenon of asset bubbles with an application to the Spanish real estate market. It is organized as follows: The first section provides a brief introduction into the subject. It firstly discusses some mechanism of property markets and determinants of asset bubbles. For further clarification it secondly refers to some countries which experienced similar processes and respective causes for their bubbles. To wind up the introductory part section 1 briefly also mentions potential threats of price bubbles. Section 2 carries out an analysis of the Spanish real estate market in order to identify possible drivers of demand. It also illustrates some similarities with countries which have in fact experienced a (bursting) price bubble in the past. The section concludes with an evaluation whether or not Spain′s real estate market is indeed suffering from a bubble. Theoretical findings will be supported by data supplied by the Spanish Housing Ministry.²

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1 For additional comparison refer to figure A.1 on page 14.

2 Ministerio de Vivienda, www.mviv.es/es/ 3