Spain Housing Market Benefits From Poor Returns On Fixed Income, Bank Deposits

The lack of investment alternatives, coupled with the fact that prices and returns are good, are two strong enough reasons for people to take their money out of bank deposits and fixed income securities and buy property. In fact, the Bank of Spain’s sector index, based on data from the the second quarter of 2016, has shown that the annualised return on property is over 10%, combining the rise in house prices (6.3%) with the return on rentals (4.6%).

These figures are the highest for nine years and represent the third year, including 2016, of positive returns after the 6.4% in 2014 and 8.8% in 2015. It is worth bearing in mind that in the pre-crisis years, 1999-2007, the annual return was close to 20%.

The National Statistics Institute and the Land Registry Office offer a similar picture, although with some slight differences. The latter highlights that in the second quarter, the average sale price rose 7.48% year-on-year compared with 6.90% in the previous quarter. This is a decline of 26% compared with the peak of the previous cycle (2007). For their part, sales increased by 23.7% in the second quarter.

According to INE, housing and public works construction has grown as much as 8% from the mínimum levels of 2013, with the housing market contributing nearly 81 billion euros to GDP in the second quarter, a figure which is way off the 141 billion euros in the years prior to the bust of the the real estate bubble.

Even without a detailed analysis by regions – there is a significant increase both in the number of house sales and prices in Madrid, Barcelona and certain coastal áreas – it’s clear that it would not be too bold a statement to say that the housing market has definitely left the crisis years behind and its recovery is being consolidated with every figure published.

But despite the positive indicators, it’s still far off 2008 levels, making a new bubble like the one which almost buried the construction sector for over five years unthinkable for the time being. There are also other reasons which keep this danger at bay. And one very important one, as one expert points out: “in those years, the outstanding mortgages balance was growing at double digits, while this year, even in the best case, it could rise 1%-3%.”

The fact the main banks remain heavily exposed to the property sector, to the tune of still over 100 billion euros, is influencing these forecasts. This amount is concealed in their balance sheets, but it can’t stay there forever and a day. So the Bank of Spain has urged the banks to sell their property assets as quickly as possible.

The big banks still have a stock of over 60,000 homes, a similar amount to that on Sareb’s books. Spain’s bad bank has accelerated the property sales process in recent times, particularly in regions like Andalucia, Cataluna and Valencia.

The construction sector’s contribution to GDP has fallen by as much as 47%, while it has not even managed to recover as much as 8% since the miminum levels reached in 2013.

*Image: Flickr