Portuguese Catholic University
Estrada da circunvalação
e-mail: zuma@crb.ucp.pt
and

Luís Valadares Tavares

The paper examines the dynamic operation of the Portuguese urban housing market with a simple but realistic mathematical model developed by Dipasquale et al (1994).

The Portuguese housing market is characterised by an extensive housing shortage, and a significant increase in the ownership rate, explained by the remarkable increase in the housing credit through the formal banking system after the end of the credit limits and the financial liberalisation process that attained in Portugal after 1983/84.

The motivation for this paper comes from two reasons. First, to test the stock-flow model’s applicability to an undeveloped housing market. Second, to learn about the operation of the Portuguese housing market and the various economic forces that determine prices and demand.

The model is based on the stock-flow model theory of highly durable goods. The stock-flow approach suggests that in short run, house prices adjust quickly to equate housing demand to the existing stock units. By contrast, adjustments to the stock of housing occur only slowly over time, and often with lags. Such stock adjustments respond to the prices determined by the market’s short-run equilibrium. This simple model specifies that determinants of housing demand are current population, income, housing user cost of capital, house prices and expectations about future prices. While high current prices dampen demand, the anticipation of capital gains through rising prices stimulates housing demand.

We estimate this stock-flow model, using adaptative expectations, for the housing market in four Portuguese districts - Lisbon, Porto, Coimbra and Faro - for the 1988-96 period. These units of analysis satisfy the geographic definition of a regional housing market, and cover the largest Portuguese cities from South (Faro) to North (Porto).

With trimestral data series, we find in the time-series study that the simple demand equation fits the data well. The results also confirms that house prices and income are the main determinants of house demand changes in Portugal. The analysis further indicates that there is an equilibrium house price/income ratio to which the market tends. Finally the empirical results provide also some evidence against market efficiency. They suggest that a large rise in house prices is due in part to irrational expectations, and thus signals a future correction as prices ultimately reflect market fundamentals.