Why are UK home prices rising? Check the sector’s lack of capacity

Housing prices have rebounded 9.1% y/y in 1T14, standing above the pre-crisis level, and unleashing again rumors of a possible housing bubble.

“The bottomline problem is not other that the imbalance between the solid demand for housing and the insufficient and inelastic supply, conditioned by a rigid planning and the lack of capacity of the sector,” analysts at Afi explained.

In addition, this introduces and upward pressure on prices that could even harm accessibility to housing and lead to British families to take on more debt.

However, capacity can be tricky too. Take the example of the Spanish real estate market.

More than a bubble, the sector has suffered a general collapse since 2008 that, unlike the UK today, is still pushing prices downwards.

Latest data from the Spanish appraiser Tinsa point to a fall of 40% from the maximum prices that marked the housing market in December 2007, thus standing at the levels of August 2003.

It is not surprising, then, that in the first quarter of the year the purchase of dwellings has tripped in Spain by 49% in the first quarter of the year. However, we should still be prudent when speaking of a recovery of the sector.

For better and for worse, Spain built more houses than the sum of the raised in Germany, France and United Kingdom, close to 800,000 in 2006. In the same year Spain consumed half of the cement used in the US (56 tons compared to 120tn), according to market sources. An excess that has been paid expensive, but also a reflection of the capacity of the Spanish construction sector.