El Clasico of Housing: Bubbles in Madrid and Barcelona’s Real Estate Markets

Abstract

This paper contributes to the housing bubble literature by analysing rental and sales price dynamics in Spain’s two largest urban centres—Madrid and Barcelona—between May 2007 and December 2024. Using monthly data from Idealista.com, Spain’s leading real estate platform, we detect the presence of price bubbles in both markets, assess their key determinants, and explore contagion effects across cities and segments. Our results show that while only a few bubbles emerged, they were of substantial duration. We also find evidence of contagion, with rental bubbles consistently preceding sales bubbles, underscoring the pivotal role of rental markets in driving price surges. Among the key determinants, higher hotel stays are associated with a reduced probability of housing bubbles, suggesting that more hotel-based tourists may help stabilise real estate markets in both urban centres. Rising interest rates and the availability of housing certificates are also linked to lower bubble risk. Conversely, increasing resident numbers significantly raise the likelihood of positive bubbles, whereas higher unemployment dampens it. These findings offer critical insights for housing policy in major urban areas.