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The « housing bubble » and financial factors:

The « housing bubble » and financial factors: Insights from a structural model of the French and Spanish residential markets Pamfili Antipa, Rémy Lecat The Macroeconomics of Housing markets Paris, 3 December 2009.

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The « housing bubble » and financial factors:

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  1. The « housing bubble » and financial factors: Insights from a structural model of the French and Spanish residential markets Pamfili Antipa, Rémy Lecat The Macroeconomics of Housing markets Paris, 3 December 2009 The views presented here are the authors’ and do not necessarily reflect the views of the Banque de France.

  2. Introduction • France and Spain: among the largest housing sector boom in the euro area • Two views: expectation bubble vs. financial factors • Structural model, taking into account: • Supply of housing • Short run and long run dynamics

  3. Outline of the presentation • Estimation strategy • Expectation bubble vs financial factors • Adjustment paths to equilibrium

  4. Estimation strategy (1) 2 approaches for fundamentals • Financial approach (Case and Shiller, 1989) Relationship between rents and prices • Macro-economic approach (DiPasquale and Wheaton, 1994) • Structural factors taking due account of endogeneity • Longs lags in market clearing due to transaction costs Error Correction Model with instrumental variables

  5. Estimation strategy (2) Demand Long run Supply h housing stock y disposable income uc user cost n demographics i investment p prices cc construction cost where are standard iid white noises

  6. Estimation strategy (3) Short run additional variables: interest rates, stock market index 1) ‘Standard’ equation 2) Equation à la Gao et al. (forthcoming)

  7. Outline of the presentation • Estimation strategy • Expectation bubble vs financial factors • Adjustment paths to equilibrium

  8. Demand side: long-run equation (1) Housing prices 1Population for France, number of households for Spain

  9. Demand side: long-run equation (2) France Spain

  10. Demand side: long-run equation (3) Overvaluation due to omitted variables? Easing of financial conditions: interest rates, average duration of mortgages, credit conditions Households’ borrowing capacity GDI : Gross disposable income; r: average mortgage rate; T: average mortgage duration

  11. Demand side: long-run equation (4) Housing prices 1Population for France, number of households for Spain

  12. Supply side: long-run equation Residential investment

  13. Outline of the presentation • Estimation strategy • Expectation bubble vs financial factors • Adjustment paths to equilibrium

  14. Demand side: short-run equations Housing prices

  15. Supply side: short-run equations Residential investment

  16. Conclusions • With standard factors, some 20% overvaluation in 2008. • When introducing demographic and financial factors the degree of overvaluation is drastically reduced. • Downward rigidity in the adjustment path to equilibrium. • Limits: Data quality + Possible reverse causality

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