The article entitled “Local Public Expenditures and housing prices” takes a comprehensiveeconometric analysis of the effect of local public investment in dwelling prices in the city of Barcelona during the period 1998-2001. According to the Spanish Ministry of Development, the Spanish property prices in this period increased an average of 53%. The importance of this analysis is that never before has any project of its kind in Spain been done, as well as providing new interpretations for the classic explanations that analyzed the evolution of real estate prices, such as demographic changes . The authors say that, apriori, it is expected that an increase in government spending in a particular area of Barcelona has a positive effect on the price of nearby properties.
The econometric model used in this case was a classic two-stage hedonic price. Recall that the basic methodology of this model provides a hedonic price equation that captures the effect of different individual attributes of a property in determining its market value through a generic function of type P = f (I, V, U , Z, S, E, W). In the first stage the authors calculate the prices in each geographic area in which is divided the sample of properties, in a total of 244 statistical areas, after controlling the effect of the physical dwelling’s characteristics. In the second stage it is analyzed, once the dummies variables were introduced, the effects of public spending per capita again in the property prices.
The results show a positive effect, although it is small, of the public expenditure per capita (approximately 10%) on property prices in the geographical area where the investment takes place. This result can draw two main conclusions. The first one, that the public sector could be partly responsible, through its local investment policy, of the increase in housing prices in the area where the investment takes place. And second, the estimation of the effect of local spending in real estate prices can derive a first estimation of the willingness of property owners to pay for increasing government spending in their local area.