Interest rates and housing cycle: the case of southern Europe

Paper presented to the VI Encuentro de Economía Aplicada, Granada, 5-7 junio 2003.House building in Spain has been very active along nineties. This fact used to be explained by the coincidence of various economic reasons generating Spanish house building cycle to be one of the most actives in Europe. There are endogenous reasons to the Spanish economy to explain this phenomena, but also exogenous ones that have the characteristic to be common to others European countries. The fall on interest rates as well as inflation, are common features resulting from the process of euro introduction, and they have had similar intensity in others European countries, as Italy and Portugal, that have not experienced such housing boom as in Spain. This paper tries to explain how the expansion on house building can be due to these general economic changes and to deep on the role of interest rates as common feature to explain Spanish, Portuguese and Italian housing cycle during last nineties and its different effect. Some output of this paper are to contrast how interest rate affect housing cycle in the long run, through its permanent components, specially the trend. Long run and stable behaviour have permanent effects and seems to be affected by EMU process in the case of Spain