Spain’s developers finished 2008 with 1.05 million newly built homes in stock, according to a new study by José García-Montalvo, a professor at the Pompeu Fabra University. Based on last year’s average sales rate this inventory of unsold new homes will take more than 3 years to clear.
Some regions are faring better than others. The excess inventory in Madrid, where developers were quicker to respond to slowing demand, will take 2.2 years to sell, compared to more than 5 years in Catalonia, where the stock of property is still growing whilst the sales rate falls off steeply.
Spain’s excess housing inventory is likely to be an even bigger problem than the study suggests. García-Montalvo only looked at the inventory of homes held by developers, and not the stock of new homes that belong to investors. By some estimates investors bought 30% to 40% of the properties sold during the boom years, and many of them are now trying to sell.
García-Montalvo’s report also has something to say about prices, which he argues need to fall “between 40% and 50%” from their peak in the first half of 2008 to bring the housing affordability ratio back to its long-term average. The housing affordability ratio is currently 7 times disposable household income, and according to García-Montalvo “this indicator needs to fall to four years, as is happening in the USA. For that to happen either household incomes need to rise rapidly, which doesn’t seem likely, or house prices need to fall.”
Assuming that prices have already fallen 20% from their peak, which there is some evidence that they have, that means prices still need to fall by up to 30% to bring prices back in line with the long-term affordability average.