Price dynamics in the Spanish housing market between 1995 and 2008. Evidence from a panel of provinces

Abstract

In this paper we follow the specific literature in order to obtain a theoretical framework for the analysis of the dynamics of house prices. From this framework results a long run relationship between the house price variable and its fundamentals. This relationship is estimated using a static and a dynamic panel for the 50 Spanish provinces and the period 1995-2008. Previous to the estimation a detailed panel unit root analysis is done. The results obtained from the estimation are according to the theory and present clear evidence of serial correlation in house prices and of income elasticity of 0.3. However, the results also suggest the existence of additional information that has not been considered in the empirical analysis. This is the existence of a spatial pattern in the data for which we provide clear evidence. Consequently, cross section dependence has to be explicitly taken into account in subsequent analysis of Spanish house prices.