The Impact of the Housing Bubble on the Growth of Municipal Debt: Evidence from Spain

The aim of this paper is to analyse the impact of the recent Spanish housing boom and the subsequent burst on local public finances. Particularly, we investigate the effect of the rise and later fall in revenue from urban development on local government debt. Using a sample of the Spanish largest municipalities in the period 2003–2011, we find that debt was substituted by revenue from urban development during boom years and this substitution effect vanished after the burst of the boom. Our results also reveal that local public finances have worsened after the burst of the housing bubble since now they have larger current spending and smaller savings.