Home building in Spain: Ten reasons to be bullish

Ignacio de la Torre, a partner at financial advisors Arcano, who correctly called the bottom of the market for Spanish financial assets in 2012, gives ten reasons to be bullish about the new development business in Spain. For argument’s sake, I challenge each reason.

In a paper “Ten macro reasons to invest in real estate development (pdf in Spanish)” de la Torre lays out his case to be bullish, starting off by asserting that “The new development market could increase by a factor of nine in the next few years, a market with huge potential in which few well-financed players have been left standing, and they will be the ones who benefit the most from this opportunity. This analysis presents the ten most obvious macroeconomic reasons why the new development market will benefit from a very positive cycle.”

1. House prices are rising.

Spanish House prices up 6.6% yoy Q3 2015. Registradores.

House prices up 6.6% yoy Q3 2015. Registradores.


2. Land prices are rising.
spanish land prices q2 2015

Land prices up 4.7% yoy in Q2. Source: Fomento


3. Housing is now more affordable.
Housing affordability as percentage of household income

Housing affordability as percentage of household income


4. Mortgage lending is rising.
spanish property mortgages sept 2015

New mortgage lending up 19% yoy in September. Notaries


5. Home sales are rising.
Homes sales up 9% yoy in September. Notaries.

Homes sales up 9% yoy in September. Notaries.


6. Unemployment is falling.
Unemployment. -10.6% YOY change, Q3 2015. INE

Unemployment. -10.6% YOY change, Q3 2015. INE


7. The new homes inventory is shrinking.
New housing inventory for sale. Fomento

New housing inventory for sale. Fomento


8. The new development market has room to grow by a factor of nine.
9. The population is rising, not falling.
10. Consumer confidence is rising.
Spanish consumer confidence, October 2015. CIS

Spanish consumer confidence, October 2015. CIS

ON THE OTHER HAND….

1. Rising house prices. It depends which figures you look at (see the latest SPI HPIT).
spi hpit spanish property house price index tracker 2015
2. Land prices are rising. True, but only where there is a market for land; everywhere else there are no transactions, so no change in prices.
3. Housing is more affordable. True, but only because interest rates are unnaturally low. If you look at house prices as years of gross household income, they still look high.

House prices as years of average income

House prices as years of average income


4. New mortgage lending is rising. True, but from a very low base, and overall mortgage lending is still falling.
5. Home sales are rising. True, but from a low base, and the market is still very depressed by historical standards and for a country the size of Spain.
spanish property market sales sep 2015
6. Unemployment is falling. True, but many of the new jobs are precarious and don’t inspire the confidence needed to take out a mortgage and buy a property.
7. It’s true the new housing inventory is shrinking, but slowly, and in many areas the glut is still overwhelming. Overall, there are more than a million homes on the market, close to four years of supply.
8. New development has big potential, but only if demand grows enough, which depends on all the other factors in this list.
9. Population increase? According to the latest estimate from the National Institute of Statistics (INE) the population is falling, down by 0.16% between 2014 and 2015, mainly driven by an exodus of foreigners.
Spanish population change, -0.16% in 2014. INE

Spanish population change, -0.16% in 2014. INE


10. Consumer confidence is rising. This is true, but judging by the comments to the article at El Confidencial, not everyone is infected with this confidence.

Comments

comments

2 thoughts on “Home building in Spain: Ten reasons to be bullish”

  1. Campbell Ferguson

    Like you Mark, I’m sceptical about all good news coming out of or about Spain at the moment. There is an election in less than a month!
    The price effects of lessening of B money are still being seen in the apparent increase in values recorded by the Registrars when the total price paid is the same or even less.
    Many purchases are being made by investors developers who benefit from ‘2%’ companies paying less transfer tax. However, they eventually have to sell to individuals who do not have such benefits. With purchase costs of 12+% and sale costs using an agent being 10+%, an individual has to see values rise by c25% just to get their money back.
    There is a huge weight of institutional money looking for places to invest and with projection graphs going ever upwards, do they never learn? If developers and contractors get money thrown at them to develop, they will, of course, do so, with the hope that similar smaller investors/speculators and individual buyers will sign up quickly. That will work for the infill sites in the prime locations, but it’s exactly the same mentality that brought the economy to collapse a short time ago.
    Buyers are being much more prudent (our building survey department has never been so busy), but there are still some wall-eyed buyers out there and some sharp selling practices being seen to return. When an agent is offered 8 or even 10% commission some of them will be tempted to get buyers to sign by whatever means possible.
    Yes, I see land being bought up and cranes appearing on the horizon, but I also see 1,000’s of empty properties available for which an increase in supply is the last thing the owners want.

  2. Profile photo of rojoybagorojoybago

    Demand is very strong in grade A areas all over Spain from end users and investors. Nobody cares about the unfinished/ second rate stuff as its not relevant and can be ignored. The election is irrelevant as the areas we talk about here are not affected – it’s a new two tier world out there!!!

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