A big part of this “boom” is caused by the second residence on the coast. As figure 1 shows, the number of second residence on the coast has been multiply by 4 in the last 7 years. Investors are looking forward to buying a second residence to rent for the income or to use as a vacation retreat. In the Spanish traditional style of life the coast has always been their chosen paradise to relief and spend a pleasant vacation. In the last decades their destination have not changed, however the type of accommodation has.

Taking advantage of the good Spanish economy balance, many families decided to move from renting to buying.As prices are not as high as in the main cities, purchasing a second residence is very profitable investment. Revaluation rate increases each year and families can also gain money off the rent from the coast residence during the winter. But not only Spaniards are awarded of the advantages of the sun and beach in their coasts. Foreigners are also focusing part of their investment in a second residence in the Spanish coast. Even sometimes, they move definitely and establish themselves in those houses. Catalui?? a, Valencia, Baleares, Murcia, Andaluci??a and Canarias are their main destinations. In the present the number of residences in those places are above 10 millions.

Around 1,1 million have foreign owners which represent 10%. Future forecasts expect an increase of the phenomenon to 3 million houses hold by foreigners. The main part of the demand comes from Germany and the UK (70%).

Disillusionment and uncertainties given by the stock market and the low returns on other investments like government debt, have increasingly turned the small investors to the real estate as a way to keep their portfolios growing.According to Chris Mayer, Wharton professor of real estate, the housing market tends to lag other more efficient markets in responding to economic change. Figure 3- Source: Bank of Spain As it can be seen in figure 3, market returns tend to be greater at the onset of expansionary phases (1984-87 and 1996-98) and negative in slowdowns (1990-92 and 2001-02). This type of behaviour might also contribute to explaining in part house prices, especially in the last cyclical expansion, in which household investment on the stock market was more widespread than in earlier periods.In 2003, GDP growth in Spain stood 1. 3 percentage points higher than the Eurozone average.

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Since 1990 Spanish nominal GDP per capita has increased by 112%. This conduct marks a significant break with the pattern of the past, when the Spanish economy paid a higher down cycle toll in production and job losses because of lags in adjusting to external and supply shocks, the rigidity of markets and the use of policies to bolster income and demand, which undermined Spanish competitiveness. Figure 4-Source: The Economist, IESEIn the past 10 years housing prices have been up to European average to integrate this convergence process to Western Economies which is very logical. However we have to underline that Spanish Average house price / GDP per capita is higher than richest countries’, such as France or Germany. This trend shows that Spanish prices could begin to be over evaluated. In 1998, the reduction of the average mortgage rates (from 6% to 4.

8%), which followed the introduction of Euro notes and coins as well as keeping stable the economic numbers, partly explains the boom in real estate demand.At present time, the average in mortgage rates is 3,75% which represent less than 1/4 of the early 90’s. The analysis of the demand, when dealing with housing markets, should pay attention to unusual specific details only present in situations in which some sort of financing are essential in the acquisition of a good. This is, basically, due to the fact that buying a house is a costly and lengthily process.

Therefore, not only the current state of the economy matters, in the study of the main variables that influences demand, but also how it will behave in the future.In this context, typical economic variables such as price and income have to be viewed in other terms. So, as explained by Stoker (2000) for the case of durable goods, the current income and price have to be substituted by other concepts such as permanent income and the housing cost of capital. The permanent income is used because in the decision to buy a house not only the current level of income matters but also the expected level of future inflows.On the other hand, economic theory tells us that homeowners “rent the stock that they own from themselves” and assuming the existence of a homogeneous good called housing services it can be concluded that the owner’s price of a house is the price of the services produced by a unit of stock at some length of time (a flow variable) that is called user cost of a unit of stock. Thus, the majority of homeowners buy a house using accumulated savings and the financing of a loan. The mechanism used to buy a house contains specific features that should be stressed in order to get a better understanding of demand.

In many developed economies consumers rely much more in mortgages than in retained earnings in the acquisition of houses. Following Fallis (1985), a mortgage contract determines the amount of the loan, the interest rate, the term of the loan, the amortization period, the method of computing the monthly payments and any other prepayment privileges. Each of these parts of the contract can interfere in the consumer’s perception about the value of the commodity housing and alter the demand for mortgages and consequently also for housing.A more complete expression for the user cost of capital can be found, for the Spanish case, in the work of Lopez Garcia (2001). There is different versions of such expression but most of them comprehends the opportunity cost of the accumulated savings that could be used in other investments, the interest paid in a mortgage, the maintenance, the insurance and the tax system.

Also, it is important to subtract from the user cost any capital gains from owning the stock.