Back in 2007, Spain was partying like it was 1999 on the back of a real estate bubble. After the fiesta came the hangover, which the Bank of Spain (BoS) now says will keep the real estate sector in recession until mid-2011 at least.
We now know that Spain’s economic miracle of the last decade was largely just a mirage built on an unsustainable bubble in the real estate sector. When that bubble burst, as it did in 2008, it sent the Spanish economy into a tailspin. In a new report released last week the Bank of Spain now says the real estate sector won’t start to recover until mid-2011, casting doubt on recent press reports suggesting a housing market recovery is already underway.
What happened during the bubble? In a nutshell, a tsunami of cheap credit sent property prices and housing starts through the roof. It was never going to last for ever, but the credit crunch made sure that it came to a particularly brutal end. When credit crunch struck, the house of cards collapsed.
And what the BoS calls the “correction” is not yet over (it refuses to use the words ‘bubble’ and ‘burst’). “Residential (housing) investment will continue contracting until the middle of 2011,” says the report. In 2007 it peaked at 7.5% of GDP, way above the OECD average. Next year the BoS forecasts it will fall to 4%. At that point, residential investment as a percentage of GDP will have fallen below the minimum it reached in 1994, during the last recession.
All of which is bad news for the Spanish economy, dependent as it was on the real estate sector for jobs and growth. “The housing market adjustment has sever macroeconomic implications in the context of the recession,” says the BoS report. As a result of the property crisis, the sector has shed 2 million jobs. The BoS says that, by the time this drama is over, the property crash will have reduced the Spanish economy by 5.4% compared to the end of 2007.
Estimating the glut of new homes
The BoS also has a stab at quantifying Spain’s glut of newly-built homes, which it estimates at between 750,000 and 1.2 million new homes for sale at the end of 2009 (developers say just 700,000). “The stock of property is high, which one can expect to condition the number of housing starts in the next few years,” says the Bank. That’s another way of saying don’t expect the residential construction sector to recover any time soon.