Testing for co-explosive behavior between mortgages loans and house prices in the Spanish economy

Abstract

Purpose The aim of this paper is to apply the methodology developed by Evripidou et al. (2022) to assess the co-explosivity between housing credit and housing prices in the Spanish economy from 1971 to 2024. Design/methodology/approach First, the authors use recursive unit root tests for explosiveness, proposed by Phillips et al. (2011) and Phillips et al. (2015a), to investigate whether nominal house prices (NHP) and housing credit exhibit bubble-like behavior at any point in the time series. Second, they apply the methodology of Evripidou et al. (2022) to assess co-explosiveness between housing credit and house prices. Thus, this study not only analyzes the univariate explosiveness of these series but also explores their interdependence. A (stable) asynchronous coexplosiveness would permit the construction of early warning indicators for upcoming explosiveness in housing markets. Findings First, to examine explosiveness in individual series, they use recursive unit root tests proposed by Phillips et al. (2011) and Phillips et al. (2015a) to assess whether NHP and housing credit exhibit bubble-like behavior. These tests identify periods of exuberance in 1988–1991 and 1992–1993 (coinciding with economic expansion before the 1992 Barcelona Olympics and Seville Universal Exposition) and 2001–2008 (preceding the subprime mortgage crisis and the “Spanish housing boom”). Second, regarding co-explosivity, the KPSS test for co-explosivity reveals no co-explosivity when house prices lead housing credit, as the null hypothesis of stationarity is rejected across all lags (−5 to +5 years). However, a significant co-explosivity pattern emerges when housing credit leads house prices, with a stable bubble relationship observed for leads of 2–5 years. The strongest relationship occurs at a 4-year lead, indicating that credit dynamics precede and drive housing price bubbles. This finding is central to their analysis, highlighting the critical role of credit in triggering housing price bubbles. It underscores the importance of addressing the leading effect of credit, which is essential for effective policy and market interventions aimed at mitigating real estate bubbles. The empirical evidence, particularly at the 4-year lead, reveals a feedback mechanism in which credit growth drives subsequent price increases. Given that their econometric analysis identifies credit dynamics as a key driver of housing bubbles, policy interventions should encompass macroprudential and microprudential measures, alongside fiscal and structural policies. Originality/value This paper examines the interaction between housing prices and housing credit in Spain from 1971 to 2024, contributing to the empirical literature on the Spanish economy in two ways. First, they use recursive unit root tests for explosiveness, proposed by Phillips et al. (2011) and Phillips et al. (2015a), to investigate whether NHP and housing credit exhibit bubble-like behavior at any point in the time series. Second, they apply the methodology of Evripidou et al. (2022) to assess co-explosiveness between housing credit and house prices. Thus, this study not only analyzes the univariate explosiveness of these series but also explores their interdependence. A (stable) asynchronous coexplosiveness would permit the construction of early warning indicators for upcoming explosiveness in housing markets.