Housing In Spain: An Unbalanced Market, But Not A Bubble

Spain’s real estate sector: from recovery to expansionAerial view of Gran Via (Madrid)

The memory of what happened in the construction sector in the last economic cycle, and its brutal end, is still alive. Which is why the increase in prices for the purchase and rent of flats that begun in 2017 is worrying. There is talk of a new bubble. If there is, it’s a very different bubble. The bubble which reached its ceiling 10 years meant not only the rise of prices but also an unsustainable increase in construction, with enos labour, demographic, fiscal and banking distortions, whose consequences have still not been completely sorted out. This, for now, is not happening.

Current situation of the market

In 2017 the prices per square metre began to recover, with growth around 3 or 4% (there are different indicators to choose from). These rates are only a quarter of those registered during the most rapid growth in hothead previous bubble (2004-2005). A little before rents, which were not discussed in the previous cicle, began there own rise, even more vigorously; some are talking about a rent bubble. Some recent liberalisation of renting policies is helping this rise, producing its effects at the worst moment. In both cases, rent and purchase, there are significant differences between localities: strong increases in Madrid, Barcelona and other cities (of the order of 7% in prices and apparently more in rents) coincide with stagnation in the rest of the country, and even falls in five autonomous communities.

Increasing activity in sale and purchase of houses. The 45,000 transactions per month last year represent significant progress over the 30,000 per month of 2010-2014, but still pale in to the 75,000 per month of 2004-2007.

Movement is also increasing in the rental market; there is little reliable data, but the Continuous Survey of Households shows that between 2013 and 2017  rented homes increased by 400,000 (to a total of 3.3 million), whereas owned homes fell by 200,000 (to  14.1 million). It is an interesting move towards renting in a country where most people still own.

But on the other hand there is no bubble in construction. In 2017 the licenses for new construction for residential use were double those in 2013 in the depths of the crisis, and could reach 100,000 in 2018. But let’s put this in context: it is less than a sixth of the 600 or 700,000 licencies issued each year between 2005 and 2007. The rhythm of growth in the housing stock within a couple of years, which is the time it takes to convert licenses into actual houses, according to experts, will remain insuffient to meet the potential need for new houses, whether because of internal demographic growth or return of immigration; plus the re-positioning of depreciated older housing; plus the demand for other needs (second home and, above all, tourism).

At the same time, there is no rapid increases in construction costs ( there are even falls in the cost of labour). The figures therefore describe an unbalanced market, with an excess of demand over supply, in which the increases in prices at the moment respond to real motivation, not speculation, or a bubble.

It is also a different market. Demand for housing to rent has grown among investors, large and small, national and international, who are looking for more profitable alternatives to purely financial products, whose interest rates are close to zero. The unusually high number of housing transactions without mortgages confirms the presence of investor buyers. In parallel there is an increase in demand for renting from those who cannot or do not want to buy a house, either because of precarious or mobility of employment.

Of course, logically this situation requires policies to encourage the housing supply, both for ownership and renting, a significant well as social renting. Unfortunately there is little sign of such policies. The budget, so constrained by the politically urgent, offers little help, and with the complicated division of responsibilities we have invented, nobody knows who should take the political responsibility and initiative. The only ones doing anything in this field are the town halls of the major cities. They are trying to use arbitrary powers to reduce the tourist use of housing or, perhaps more to the point, to guarantee the sleep and tranquillity and votes of the long term residents of the neighborhood. A market with long adjustment times, and subject to social pressures because too it’s nature as a prime need, cannot be left completely to the free interplay of supply and demand. But I doubt it’s plan can be organised with a nit picking attitude.




About the Author

Raimundo Poveda
Raimundo Poveda is a former Bank of Spain's banking supervision director.