The relentless decline in rental prices suggests the market is still over-supplied, and though house prices in relation to rental incomes have stabilised close to their long-term average, falling rents could mean more pain to come.
The average price of renting a home in Spain fell by 0.4% in September compared to the same month last year, according to the latest consumer prices figures from the National Institute of Statistics (INE).
Spanish rental prices have now fallen for 30 consecutive months in a sign that the market is still oversupplied with housing, as landlords who can’t sell turn to the rental market instead.
Rental prices fell in all regions with the notable exception of Catalonia (+0.2%) and the Balearics (+0.2%). Rents fell the most in La Rioja (-2.6%), Madrid (-1.1%) and the Valencian Community (-0.8%). They also fell in Murcia and Andalusia (-0.5%).
RENTS AND HOUSE PRICES
According to one theory, house prices should reflect cash flows from rents, allowing house prices to be valued as a multiple of rental income, like the price/earnings ratio is used to value equities trade on stock markets.
By this measure, Spanish house prices are now reasonably close to their long-term average, according to data gathered by The Economist magazine for its global house price index.
As illustrated by the chart above, Spanish house prices as a multiple of rental income became wildly over-valued in the boom years, reaching a peak of 88% above the long-term average in Q3 2007 , but have subsequently crashed to 10.8% above the long-term average (Q4 2014). Spanish rental prices have fallen, but house prices have fallen further, bring the price against rents ratio down close to the long-term average.
The same cannot be said for house prices in the UK, which are now 47% above the long-term average, and close to the record high of 55% reached in Q3 2007, also shown in the chart above
The Spanish price to rents ratio has been recovering since bottoming out in Q4 2013, suggesting that house prices are now increasing relative to rents (or falling more slowly than rents). This is borne out by the latest official figures (where the The Economist gets its data), showing Spanish house prices rising by 4% in Q2, and rents falling by 0.4% September, as reported above.
But if rental prices continue falling, that’s bad news for house prices (at least as far as owners and vendors are concerned), and calls into question any recovery outside of some localised hotspots like Barcelona and Marbella, where the market is boosted by foreign demand.