Determinants of housing prices in Spanish cities
| Pages | 109-135 |
| Date | 01 April 2003 |
| DOI | https://doi.org/10.1108/14635780310469102 |
| Published date | 01 April 2003 |
| Author | Paloma Taltavull de La Paz |
| Subject Matter | Property management & built environment |
Academic papers:
Housing prices in
Spanish cities
109
Journal of Property Investment &
Finance
Vol. 21 No. 2, 2003
pp. 109-135
#MCB UP Limited
1463-578X
DOI 10.1108/14635780310469102
ACADEMIC PAPERS
Determinants of housing
prices in Spanish cities
Paloma Taltavull de La Paz
International Economics Institute, Department of Applied Economic
Analysis, University of Alicante, Alicante, Spain
Keywords Spain, Property markets, Supply and demand, Housing
Abstract Residential price levels in Spain vary broadly among markets. Real estate theory
explains that prices depend on market characteristics such as vacancy level, land availability,
construction supply elasticity to respond to high or low speed to changes on the demand, as well as
potential for economic growth, industrial and services activities located inside urban areas, etc.
An analysis of prices in Spanish main cities shows that tensions appear to exist in some of them
where economic activity shows different dynamism and price level appears to be independent of it.
This paper tries to find evidence of the existing relationship between residential prices and
economic and demographic factors that are demand determinants such as wages, migrations and
productive structure, among others, to explain price formation in Spanish cities. It uses panel
data and GLS methodology applied to 71 main Spanish province capitals and cities with more
than 100,000 inhabitants. The results show evidence of determinants of housing prices and how
some relationships appear to exist between price levels and families' waged income as well as with
population and productive structure in Spanish cities.
1. Introduction
It is common to find how housing prices have different levels in cities
belonging to the same economic system. Such differences have been attributed
to economic dynamism and level of income inside the area, i.e. higher levels of
GDP generated have an influence on housing levels in the city. This is not
always true, and one could find cities located in very dynamic economies with a
lower level of housing prices than others with less capacity for wealth
generation, as occurs in Spain (Taltavull, 2000a, b). International literature has
looked for reasons to explain these differences in cities' growth determinants
and labor market specialization.
The relationship between labor and the housing market has been present in
economic literature on residential markets from the outset. The traditional
focus is oriented to demonstrate how evolution of employment impels housing
demand through diverse ways, such as having influences on householder
formation and, within the context of life cycle theory, relocation of workers and
demand for a higher level of housing quality that potentialize the residential
market in the new companies' area where they are located. The use of labor
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The author wishes to thank Rafael Myro for his suggestions to improve this paper and to
Miguel Angel Campos who helped to correct the English version. The author would also like to
thank the anonymous referee for his helpful comments. This paper is an output of the research
project number GV01-008/00 supported by Generalitat Valenciana.
JPIF
21,2
110
market indicators as key factors to explain residential demand and housing
prices is found in the literature since the initial research and ab initio, the
analysis of existing relationship between the labor market and urban areas has
been of interest, as well as its expansion and prices.
Recently this focus has been retaken analyzing growth relationships
between economic activity and the expansion of cities. There are numerous
previous research projects that contrast the expansion of the residential areas
located around the largest cities with both the increase in the size of their labor
markets and the growth in the productive capacity of the sectors into the area.
This phenomenon is generating a series of studies in Europe that analyze, on
the one hand, competitive formulas among the cities to attract the location of
industries, and on the other hand, changes in labor mobility depending on the
characteristics of residential markets. For example, Schmitt and Henry (2000)
demonstrate how the existence of medium-sized cities has positive effects on
both employment and the changes in rural population reaffirming territory
integration and limiting agglomeration effects on the population in the big
cities. Coulson (1999) confirms that local shocks on productive sectors are more
important for urban growth than national ones; especially those that affect
industry, services or in the public sector activities. Clark and Withers (1999)
contrast the relationship between the changes in employment and residential
relocation. Pogodzinski (1995) contrasts the negative impact that the shortage
of housing has on labor mobility, generating a reduced labor supply in those
residential markets that have such imbalances.
Population concentration in cities, a phenomenon that has occurred in
Europe over the last two decades, is often present in this approach, and the
responsibility for housing price expansion in city centers and surrounding
urban areas with higher production and rents' rates, is attributed to the
housing market mechanisms themselves (Meen and Andrew, 1998). Voith
(1999), for example, contrasts how the growth in cities' employment has a
significant effect on the residential values in home areas and business centers
and how it decreases with the distance from them. Tse and Webb (1999)
explain how housing appreciation is independent of inflation in the long term,
showing a particular evolution, and Potepan (1996) finds an important
relationship suggesting that household income and construction costs are the
most important factors causing housing prices to vary between metropolitan
areas. The highest levels of family income in cities seem to be explained by a
greater degree of specialization and productivity by the workers located in
them, although this advantage is compensated for by the existence of a higher
cost of living (Glaeser, 1998, p. 142).
The notion of cities as large centers with more possibilities for education
that give the opportunity to obtain higher waged earnings, is at the basis of the
expansion of metropolitan areas in a feedback process. In this sense, Eaton and
Eckstein (1997) predict that the largest cities provide (and will continue to
provide) the best environment possible, one that favors learning, work force
education and growth prospects, because of the higher levels of human capital
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