“The combination of low prices and the sharp decline in returns from other financial assets is creating a market context in which the only way to get returns higher than inflation is investing in riskier assets like variable income securities or the real estate sector,” the bank suggests in its latest report on the residential market.
This will “contribute to accelerating demand for housing in the next few years,” the bank concludes in the overall positive outlook.
“The Spanish property sector is starting a change of trend towards a period of recovery,” says Bankinter, one of Spain’s banks that was not nationalised in the wake of the real estate crisis. The downward trend will continue into the second half of 2014, but in 2015 the market “will witness the first signs of recovery,” the bank predicts.
However, they warn the recovery will be “very gradual” and will be conditioned by high levels of unemployment, a falling population, and a large supply of excess housing inventory. Data released last week showed a marked improvement in unemployment, but about 25 per cent of Spaniards remain out of work.
Price increases will be checked by the limitations of local purchasing power and discounts applied to foreclosed assets, the bank says. Sareb, Spain’s “bad bank,” is dumping housing stock at reduced prices, keeping inflation pressures in check, the bank notes. And, although prices are low, they are still not necessarily affordable to local buyers, the bank notes.
The end of tax breaks for buyers plus lower salaries mean that housing affordability has not improved in-line with lower house prices for the average Spanish household. The housing affordability ratio now stands at 33.8 per cent annual household income, meaning the average house still costs 5.9 years of average income, which is better than recent years but not yet in bargain territory for locals denied mortgage financing.
“Cheaper prices do not necessarily imply that homes are more accessible,” the bank said.
The bank also notes that a large percentage of the homes remaining on the market may never be sold at current prices, an issue rarely discussed in the market. There are some 740,000 new homes on the market according to recent figures from the Housing Department, of which “a significant part, in our opinion no less than 100,000 homes, is concentrated in undesirable new developments.” These homes “can only be sold over the long term at demolition costs,” Bankinter notes.
As a result, despite the glut of homes on the market, there is a “shortage of new supply” on the horizon, the bank concludes. Bankinter already observe a tightness in supply in prime areas of big cities and tourist areas, allowing them to “anticipate that the price trend in the best areas will be upward.”
That upward trend should be aided by renewed interest from investors. Foreign investment is increasing in commercial property and that should help spark the residential market, the bank says.
“Foreign investment in real estate is accelerating and the upward pressure that is starting to been seen in the price of real estate assets like hotels, offices, and commercial centers will make itself felt on the quality residential market in the coming quarters,” says Bankinter.
The bank expects a notable recovery in some prime segments, though the overall recovery will start slow. According to Bankinter the “first improvements will not break the 4 per cent level in overall terms, but they will be significant in certain prime locations.” Barcelona and Madrid will be among the first markets to recover, the bank forecasts.