Household spending squeezed by falling property prices says Bank of Spain

Household spending in Spain is being squeezed by falling property prices, according to the latest report from the Bank of Spain.

For every 10,000 Euros fall in property prices, there is a corresponding fall in average household spending of 300 Euros per year. When the head of the household is in the 35 to 44 years bracket, the fall in spending is 600 Euros per year.

The Bank of Spain’s report explains the well known transmission effect from property prices to private consumption. Properties are the main form of collateral for household borrowing, so falling property prices reduce the ability of households to borrow and spend. The Bank estimates that for every 1% fall in property prices, household consumption can fall by more than a tenth through the “wealth effect”.

Nevertheless, the report argues that falling property prices will only have a “considerable impact” on consumption and the rest of the economy if the fall in prices is “very abrupt”.

That said, evidence of a wider slowdown in private consumption and economic activity has already begun to emerge. Excluding exports, Spanish company revenues are down 3% this year. Business closures are up 37%, and new business start-ups are down 24%. The number of Spanish companies seeking protection from creditors is at record highs.

The slowdown is particularly acute in the real estate sector. The sector’s turnover was down 9% in the 4 months to April, and b y 20% in March alone. Turnover of the biggest, listed developers is down an average of 60%.