The Ministry of Development has just released some statistics that help illustrate the severity of Spain’s construction boom and bust. What is worse, there is no quick solution as much of the trouble is stored up in a new homes glut that will take years for the market to digest.
The new figures show that 387,000 new homes were finished last year, despite a property market crash already into its second year. Compare this to the 220,600 new home sales recorded by the National Institute of Statistics for 2009, and you get an over-supply of around 166,500 new homes that joined the glut of new homes languishing on the market in search of a buyer.
As a result there might now be something like 1.1 to 1.2 million new homes on the market, the equivalent of the entire housing stock in Madrid. BBVA, one of Spain’s largest banks, put the figure last year at 1.1 million, to which we need to add the new 166,442 finished and not sold in 2009. The developers’ association and the Ministry of Housing are more optimistic in their estimates of between 700,000 – 750,000 new homes on the market, but even at that level it will take years for the market to absorb.
How much is too many new homes?
How much is too many new homes? It all depends on how many new households start each year, as new household formation drives demand for new homes.
Last year, there were around 225,500 new households formed in Spain, down from 300,000 plus p.a. in the boom years. New household formation surged as immigrants flooded into the country and changing demographics and life-style choice (for example and increasing divorce rate) pushed up the demand for housing. But even at the boom level of 300,000 new households a year, it is now clear that Spain was building way too many new homes.
In 2006, for example, there were 865,500 planning approvals, (though not all of them went on to become housing starts). And in 2007 there were a record 641,500 housing completions. Now even if you assume that demand for second homes was a generous 200,000 per year, Spain was still building something like 200,000 or more excess homes per year. Now they are idling on the market, tying up capital, and dragging down the Spanish economy’s productive potential.
At least supply has finally adjusted to demand, though the astonishing collapse in new residential construction is creating economic havoc (a collapse in new building is just as bad for the economy as too much building).
Residential planning approvals last year were down to 110,000, the lowest level since the present data series began, and lower even than the 1970’s, when the population was much smaller.
A couple of examples will illustrate how severe the shock has been.
In Malaga city (550,000 residents), planning approvals have fallen from 7,500 in 2003 to 800 last year. And in Madrid, the Spanish capital, they have fallen from 35,000 in 2003 to 3,375 last year. That’s a drop of almost 90%. Therein lies the key clue to Spain’s serious economic problems.