COLLEGIUM OF BUSINESS ADMINISTRATION Piotr Kasprzak, M.A. Dissertation Summary The Spanish housing bubble burst and stabilization measures. Doctoral dissertation written under the guidance of Prof. Marek Bryx, Ph.D. Warsaw, 2017.
The main purpose of the dissertation is to investigate the phenomenon of the recent price bubble in the Spanish residential property market and stabilization measures undertaken in a consequence of its burst. This problem has the theoretical and practical relevance, both for the efficiency of individual investments and the security of the financial system and public finances. Taking into account global consequences of speculative bubbles in housing markets, fundamental assumptions of the classical and neo-classical economic theory of market efficiency and rationality of its participants are questioned. Today's theoretical discussion goes back to its assumptions, tools and methods used. Increasingly appreciated is a view strengthening the role of the economics as a social science. The dissertation proposes a heuristic approach in the analysis of causes and effects of the Spanish housing price bubble, defining them as an overlap of specific, mutually reinforcing and reflexive macroeconomic, social and psychological factors, stimulated by the changing paradigm of the state power-society relations. In order to achieve the main purpose of the dissertation, the following auxiliary objectives (research tasks) were defined: i. Identification of causes of the Spanish housing price bubble and potential links between: economic, behavioral and socio-political factors that triggered it. ii. Analysis of economic and socio-political consequences of the Spanish housing price bubble and its burst. iii. Assessment of an effectiveness of selected stabilizing actions undertaken by the Spanish government and the central bank, also in the context of Spain's participation in the EMU. iv. Presentation of proposals for alternative stabilization measures. v. Identification of red flags for a country s economic growth based on the real estate market, whose definition might also be relevant in the context of the Polish economy.
The literature study of the subject allowed theoretical identification of mechanisms underlying the phenomenon described and its methodological and analytical basis. Various research methods have been used in the qualitative and quantitative research, such as the case study, including: descriptive, historical and comparative indicator analyses. The dissertation is divided into five chapters, the introduction, the conclusion, the bibliography, the list of drawings and tables, and the annex containing data and detailed analyses carried out during the study. In Chapter One, selected market theories are presented. Based on an assumption that a proper description of the reality requires opposite theories, i.e.: the efficient market hypothesis (EMH, by Eugene F. Fama), the theory of reflexivity (George Soros), and the financial instability hypothesis (FIH, by Hyman P. Minsky) are discussed and extended. In summary, a critique of EMH's distracting influence is presented and assumptions of the inefficiency of the real estate market and the reflexivity of processes in modern economies dominated by the financial system are accepted. In Chapter Two, further exploration of theoretical foundations of the research problem are expanded beyond a strict framework of division into micro, macroeconomic and financial theories. Moving into a still undefined area of economics, as a more social than natural science, behavioral and socio-political reasons for market imbalances are analyzed: the prospect theory (Amos Tversky, Daniel Kahneman) and the economic theory of interest groups (Mancur Olson). Selected experimental studies of property markets in behavioral terms are presented. In summary of the theoretical research, the phenomena of rent seeking and moral hazard are indicated as superior to other laws governing the behavior of homo sapiens oeconomicus, and defined as some of main factors destabilizing the market. Moral hazard is becoming widespread and it can be observed not only in the risky behavior of banks "too big to fall", but also in government attitudes. What would be socio-economic and political consequences if it would dominate the attitudes of households? In Chapter Three, selected processes that took place in the Spanish economy are discussed, in the context of the Olson-Minsky socio-financial cycle, which is a synthesis of the Minsky cycle and behavioral aspects of Olson s interest group theory. One can observe that after the inclusion into the Economic and Monetary Union, the Spanish economy experienced a long period of a dynamic development, which however, due to universal processes and its specific conditions, led to a number of imbalances.
Chapter Four is a continuation of the above description and covers the period of the Spanish housing price bubble. It is also an empirical part of the dissertation in which several hypotheses are discussed. The study reveals that an access to cheap financing (associated with Spain s participation in the EMU) of the economy dominated by a strong and politicallyanchored banking sector led to its unbalanced development and a suspension of fiscal reforms, which resulted in a deep economic crisis. After years of prosperity, Spain is now a highly indebted country, both in the public and the private sectors. Although the economic recovery is noted, its sustainability can be questioned. The fifth chapter contains a description and an assessment of stabilizing actions undertaken by the Spanish government and the central bank during the subsequent phases of the previously defined mechanism and the ongoing crisis. The traditional fiscal measures taken in years 2008-2011 as a result of a denial of the structural nature of the Spanish crisis were widely ineffective. As a consequence, in subsequent years, Spain facing bankruptcy was forced to accept an assistance of the European Union. A number of further actions, mainly monetary and macro-prudential, were undertaken. These measures have had positive effects, especially in restructuring of the banking sector. However, its position continues to dominate the economy. Fundamental causes of the housing bubble have not been resolved and, due to factors such as rent seeking and moral hazard inherent in the economy also characterized by bank bias, the long-term effectiveness of stabilization measures may be limited. The main conclusion of the dissertation is an observation that in the modern financial and economic reality it is necessary to take into account the behavioral and sociological factors such as rent seeking and moral hazard. The lack of a deeper analysis of economic processes allowed a concealment of the fact that automatic stabilizers did not ensure the stability of the fast growing economic system, as the growth was accompanied by unfavorable structural changes. The European context of the process of creating and cracking the Spanish housing price bubble is of the most significance. Just as, on the one hand, participation in the EMU area has contributed to the destabilization of the Spanish economy, so it now delivers an important support for the stabilization measures being undertaken. However, it can also be noted that the EMU is not only burdened by similar defects of underestimation of moral hazard in the economic system, but is subjected to its influence as well.
One could agree with the view that the euro zone membership secures individual countries, just as it secures the power of its banks, but in order to eliminate the negative economic phenomena defined in the dissertation, it is necessary to return to original assumptions of the union, and to ensure economic freedom and free movement of production means, capital and labor in particular. Until the households are tied to their homes with a long-term mortgage backed by their lifetime property, this freedom of movement is only a myth. It is necessary to change the system in order to detach loans from the borrowers' other property. The effects of non-recourse solutions should have a positive impact primarily on a transfer of responsibility for the valuation of credit risk to banks. Although undoubtedly the price of non-recourse loans would increase, such a solution seems to be optimal as it limits the demand in the housing market, is anticyclical and decreases its instability. Another postulated solution is to formalize the influence of economists on economic policy. It is important to realize a massive impact of misinformation on the public opinion. At the same time voters are increasingly aware of their real power in political processes and it is essential to educate them, act in advance and show them the long-term consequences of wrong decisions and unauthorized or unrealistic expectations. Moral hazard requires further research, especially in the area of households, because it is clear that its importance will increase, especially with regard to the current shift in the paradigm of the state power-society relations, reinforced by the influence of social media, the phenomenon of fake news, self-organization of social groups, etc. There is no doubt that housing finance is now one of the most important areas of economics, and the link between the approach represented by different social sciences followed by research methods required in economics can produce interesting results. It is necessary to develop this area without delay because the dynamism of the changes and their reflexive and real effects on the political scene will have more than a fundamental influence on the shaping of the future socio-economic reality.