The housing bubble and financial factors:

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

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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
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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
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Demand side long-run equation (2)
France
Spain
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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
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Demand side long-run equation (4)
Housing prices
1Population for France, number of households for
Spain
12
Supply side long-run equation
Residential investment
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Outline of the presentation

• Estimation strategy
• Expectation bubble vs financial factors
• Adjustment paths to equilibrium

14
Demand side short-run equations
Housing prices
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Supply side short-run equations
Residential investment
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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