February 2005

A new report by the Spanish savings bank ‘Caixa Catalunya’ and an outburst from the President of the Council of Architectural colleges of Spain swing the spotlight onto the gap between supply and demand for residential property in Spain.

The Spanish Property Market: A New Report by Caixa Catalunya

The report by Caixa Catalunya – one of Spain’s leading savings bank – entitled “Demography and housing in Spain and its Autonomous Regions” examines the expected level of supply and demand for residential property in Spain over a 10 year period between 2001 and 2011

The report – prepared for Caixa Catalunya by Professor Josep Oliver – finds that whilst demand for new residential property in Spain over this period will reach 400,000 units per year (estimate), the number of new housing starts in 2004 was almost 700,000 units. According to figures from the Spanish Housing Ministry the number of new housing starts in recent years were 524,181 properties in the year 2002, 636,332 in 2003 and 687,051 in 2004. The report concludes that the supply of Spanish property exceeded the demand for housing in Spain during 2004 by 300,000 properties and that this excess will continue until new housing starts fall.

The report breaks down the expected annual demand for 400,000 new Spanish properties as follows: 230,000 main residencies caused by demographic developments, 100,000 holiday homes bought by Spaniards and 70,000 second homes bought by foreigners investing in Spain.

Over the 10-year period (2001 – 2011) the report forecasts that 2.3 million new households will be created in Spain, driving the demand for an average of 230,000 new main residencies each year. Half a million of these new households will be made up of economic migrants and the remainder the result of changing social trends amongst Spaniards such as smaller families and an increasing divorce rate.

The report points out that the demand for property amongst Spaniards has grown strongly in recent years and attributes this to the health of the Spanish economy, which has notched up 11 consecutive years of uninterrupted growth. Average Spanish household wealth has grown with the economy and many Spaniards have chosen to invest their wealth in Spanish real estate. Consequently one of the report’s main conclusions is that the future growth of the Spanish real estate market depends heavily upon the continuation of exceptionally favourable economic conditions.

Given the present lack of any obvious threats to continued economic growth in Spain (a moot point, Spanish Property Insight would like to note) and with Euro-zone interest rates expected to remain low, the report’s author, Professor Josep Oliver, sees no reason to expect a hard landing for the Spanish real estate market. “In my opinion supply and real demand for housing will converge without trauma, just as is happening in the United Kingdom where reduced growth has not translated into falling prices.”

Professor Oliver goes on to say that “The overall level of supply will fall in the coming years but at the moment there exists a combination of factors that sustains the construction of many more properties than are needed.” The overall conclusion of the report is that the present level of new housings starts in Spain is unsustainable.

The Spanish Real Estate Market: Spain’s architects give their opinion

The council that represents Spain’s architects (Consejo Superior de Colegios de Arquitectos) expressed a much more strident opinion of the Spanish real estate market during February. The council’s president – Carlos Hernández Pezzi – used harsh words to describe what he called a “property bubble” in Spain and referred to an “inflated housing stock of poor quality”.

Hernández Pezzi chose not to pull any punches, describing as “unsustainable” the present level of new housing starts in Spain and claiming that the supply of new property is three times the level of genuine demand based on housing needs. According to his figures the real demand for property in Spain lies somewhere between 250,000 and 300,000 properties per annum, nothing like the 757,680 new housing starts he says took place in 2004 (compared to 687,051 cited by Caixa Catalunya’s report). In his opinion the excess of new properties being built helps to demonstrate that the 17.4% increase in Spanish property prices during 2004 is “inflated various times over”.

Hernández Pezzi goes on to say, “resources are being squandered building properties for demand that doesn’t exist,” and that consequently “filling this country with foreigners and tourists will be our only hope of soaking up the excess of properties.” He points out that Spain already has Europe’s highest level of home ownership (1.5 per household compared to a European average of 1.11) and the highest level of new housing starts relative to population, with 18.1 new properties per thousand compared to the European average of 5.6.
According to Hernández Pezzi this situation has serious social and environmental costs and undermines Spain’s long-term economic prospects.

The Spanish tendency to invest “year after year” in new property means that 17% of Spanish GDP is sucked up by the real estate sector, a level far higher than the European average of 3.7%. This makes the Spanish economy far too dependent upon the real estate sector – putting too many of its eggs in one basket – and diverts investment from more productive alternatives such as research and development. Investing in real estate contributes little to productivity growth – something that will determine more than anything the future wealth of industrialised nations like Spain. The over-inflated cost of property and the lack of rental alternatives also reduce labour mobility, undermining the ability of the economy to match the supply and demand for labour, and leading to pockets of high-unemployment in some parts of Spain and a scarcity of labour in others.

The social costs of a white-hot property market in Spain include shutting first-time buyers out of the market and forcing young Spaniards to spend 10 years longer living at home with their parents than other Europeans do. This undermines the confidence of young Spanish adults, stunting their development according to Hernández Pezzi, and delaying the age at which they learn to cope independently. The environmental costs of the construction boom include over-development of Spanish coasts and cities, which Hernández Pezzi describes as being “hammered”. He was also highly critical of the quality of new building in Spain.

Nevertheless the council that he represents expects another year of robust property price increases with price rises falling only a fraction short of the 17.4% clocked up in 2004. Hernández Pezzi called on the Government to step in to address the “rigidities in the property market” given that rental alternatives are scarce and that “Spaniards have only one option to meet their housing needs: to buy at any price”. He proposes that: 1) the government use the stock of public land as a mechanism “to regulate the market” and that 2) the practise whereby local governments use land sales as their principal source of income is reformed.

Supply and Demand for Property in Spain: Conclusions

Both Caixa Catalunya’s report and Hernández Pezzi representing Spain’s architects agree that the present level of new housing starts in Spain is significantly above the level of real demand for housing and is therefore unsustainable. Note that the real demand for housing is not the same as the real demand for property as this latter figure will included speculative investments from both Spaniards and foreigners.

However the architects are far more critical of the present state of Spain’s real estate market than the report prepared for Caixa Catalunya. Whilst the bank’s report limits itself to a fairly cold analysis of supply and demand, the architects have expressed great concern over the social, environmental and economic costs of a property bubble that they believe exists in Spain today. The two sources also disagree over the extent to which supply exceeds real demand, the architects saying 3 times and the bank saying less than double.

Despite the negative view of the Spanish property market taken by Hernández Pezzi, he expects property prices to continue growing by double digits in 2005, falling just short of the 17.4% achieved in 2004. Implicit in his argument that Spain is experiencing a property bubble is the possibility of a hard landing sometime after 2005.

Caixa Catalunya’s report does not provide any forecasts for price rises in 2005. However the report does forecast a soft landing for the property market over the next few years, which would imply that prices are expected to continue growing in 2005, though at a slightly slower rate than the 17.4% achieved in 2004.

For 2005 at least it seems both sources expect a similar level of growth in Spanish property prices at somewhere between 10 and 17%.

© Mark Stucklin (Spanish Property Insight)