Answer all the questions below:
1. What has happened to house prices in Spain before the 2008 financial crisis? Please describe the overall dynamics of Spain’s housing prices during 2000-2008 and include at least some quantitative descriiptors of their behavior.
2. What is the difference between nominal and real house price increases? Please explain the concept of nominal vs. real changes in prices. We are not asking you to locate specific data on real house price changes in the Exhibits.
3. Why could a strong growth in real house prices within a few years signal a bubble? In answering this question, you may assume that inflation in Spain averaged approximately 3.2% between 2000 and 2007 and stayed in the range of [2.8%, 3.6%] and that its population grew by an average of about 1.7% during the same period. See also Exhibit C.
4. Consider Exhibits D and E.
A quick note on terminology: A negative current account means that money is flowing into a country from abroad—that is, foreign investors invest in a country with a negative current account. A positive current account or surplus in a current account means that money is flowing out of a country.
Discuss how the increase in the Spanish debt-to-income ratio between 2000 and 2008 (Exhibit D) and the negative current account before the 2008 Financial Crisis (Exhibit E) are related to the strong house price growth.
5. Consider real estate as an investment. Describe two ways in which you can generally profit from investing in real estate.
6. Based on Exhibit F, describe how important construction and housing services were for the Spanish economy in 2007. How does that compare to other European countries?
7. Consider the Spanish economy in 2007 and 2008. Why would a drop in house prices most likely cause a recession? In your answer, please consider the impact on (1) Spanish households and consumption; (2) availability of credit; (3) foreign investment, and (4) employment in the economy.
8. Consider Exhibit G. By how much, roughly, did unemployment increase in Spain between 2007 and 2009?
9. In comparison to the other European counties shown in Exhibits F and G, could the size of the real estate sector account for the differences between Spain and the other countries in explaining the change in Spain’s unemployment rate? Why or why not?
10. Exhibit H shows that it took Spain approximately ten years to get back to the level of GDP in 2007. Explain how the high debt levels shown in Exhibit D and decrease in property values after 2008 shown in in Exhibit C contributed to the slow recovery.
Attached is the reading material
