The housing bust in Spain was characterised by a significant and rapid drop in home ownership among the younger cohorts, a relatively homogeneous but significant decrease in consumption and significant movements in the rent-to-house price ratio. To uncover the causes of these movements, we solve and estimate an equilibrium life-cycle model with non-linear income, mortgage and housing and rental market dynamics, and simulate a series of counterfactual policy changes and macroeconomic conditions observed in Spain during the period. The lion’s share of the observed drop in home ownership and consumption and the housing market dynamics can be explained by the tightening of credit conditions and the major shift in income dynamics observed in Spain between the boom and bust phases.
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