Expect to be surprised by the speed of the Spanish property market recovery from now on, a Madrid-based financial consultancy has claimed in a recent report widely covered in the Spanish press.
Translation and adaptation of an article published in El Mundo.
“The recovery of the Spanish property market will take place sooner than many forecast, and with higher and quicker price rises than the market expects,” said Ignacio de la Torre, a partner in the financial advisory company Arcano, during the presentation of Arcano’s report on the Spanish economy, The Case for Spain III: Plus Ultra.
The report compiled by De la Torre – who is not a property expert, as he pointed out to the audience packed with property developers invited by their association Asprima – looks at forecasts for the sector from the perspective of the macroeconomy, and the behaviour of financial markets. This is a different perspective from the one usually taken when looking at the real estate market.
De la Torre identifies two basic misconceptions in the traditional analysis: 1) that the stock of unsold property will hold back the sector’s recovery, and 2) that property prices are overvalued in relation to household income. These two arguments areused by those who, in his opinion, try to justify the fact that the property market will continue to be depressed for several more years.
House Prices Will Rise
Arcano’s report states that after the ‘massive’ drops in prices – bringing the adjustment in principal residences to 34 per cent and to 45 per cent in second homes – very few analysts are forecasting a quick recovery on the basis of the historic link between prices and purchasing power. But, according to De la Torre, “the general consensus is wrong”.
Explaining why, De la Torre says you cannot forecast price changes based on the relationship between house prices and incomes by “ignoring key factors such as interest rates, liquidity from the European Central Bank (ECB), or the influence of foreign demand in the residential market”. These factors, in his opinion, cause an increase of demand for property, and help explain why property prices have already started to rise in some areas “a lot sooner than everyone expected”.
“The relationship between property prices and interest rates is reversed,” De la Torre argues. “With low rates, the value of properties increases over the historic average, and today we have the lowest rates ever.”
On the other hand, he believes that the massive injection of liquidity by the ECB will cause asset inflation, which will end up affecting property prices, “a monetary phenomenon that cannot be ignored in any forecast for prices”.
Furthermore, De La Torre argues that linking property prices to household income “has limited validity” when you bear in mind that “a quarter of the market is in hands of foreign buyers with considerably higher incomes”.
Dwindling Stocks With Real Demand
Regarding the figure of 600,000 unsold properties, an official estimate of the housing stock, De la Torre thinks that although it’s high it isn’t a determining factor since, in his opinion, the key is not in analysing this figure but its geographical distribution, and the link between those regions and the country’s GDP.
“When you look at the distribution of this excess housing supply, huge discrepancies can be seen with an important concentration in regions that contribute less than a third of the GDP while in autonomous regions such as Madrid, Catalonia and the Basque Country, which account for 43 per cent of GDP, supply is below its historic average,” De la Torre points out. He claims that “this is a sign that a timid recovery of prices and activity could take place in these areas, and would explain why in areas such as Madrid and Barcelona property purchases in 2014 increased at double the national rate”.
He also believes that it’s important to look at the distribution of the stock within the same province. In this sense, his report highlights that in regions with a big contribution to GDP the absorption of the excess supply is irregular, and so not impeding new projects from starting.
In the region of Madrid in particular, he mentions that while supply has dried up in some areas such as the north of the capital and municipalities in the northwest, it remains high in towns in the south. This imbalance has not prevented prices for properties in the north from going up or developers from starting new projects there.
On the other hand, the Arcano report highlights that the ratio between new properties built and sold in a year is 0.25 (four new homes are sold for every one built), a long way off the 1.89 reached in 2008. According to the analyst, this indicates the huge potential for “growth in the sector”.
The Only Way Is Up
De La Torre argues that the only rational forecast for the residential market is “ an upward trend,” especially when you consider the sector is starting from from almost a complete standstill (“the adjustment has been ridiculous,” he says).
In this respect, he highlights that the average contribution of the property and construction sectors to the Spanish GDP “have always hovered around 7 per cent, reaching 12 per cent before the bubble burst and currently nearer 5 per cent. This means there’s the potential to increase almost 2.5 per cent of the GDP without the market overheating”. This increase has already appeared in the latest quarterly figures for GDP, he claims.
The same thing applies to new-build construction. As he points out, the mere 35,000 properties started during 2014 are a just a third of those built during the recession in 1959, when Spain had 20 million fewer inhabitants. “We’re facing a normalisation in these figures to reach 200,000 properties a year, creating big employment opportunities,” De la Torre explains.
According to Arcano, for every point of GDP construction goes up or down, 230,000 jobs are created or destroyed. This will mean the creation of 530,000 jobs if, as they estimate, the property sector grows from 5 to 7.3 per cent of GDP over the next few years.
But the principal driver of any housing market recovery, says De La Torre, will be an improvement in mortgage lending conditions, for developers as well as buyers. Mortgage lending has gone from “there isn’t any, nor is any expected,” to “here it is, and it’s going up,” says De La Torre. “At the end of 2013 few people believed that credit would change so quickly but change it did.”
Spanish Property Insight adapts and translates selected articles from the local press for the benefit of non-Spanish speakers.
This translation is based on the following article (in Spanish): El mercado de la vivienda se recuperará antes de lo esperado
Thoughts on “Spanish Property Market To Recover Sooner Than Expected”
Anne G says:
Thanks for the translation. The article makes a lot of interesting points which make a lot of sense. Some of which is lost in the translation, though, as in “The relationship between property prices and interest rates is reversed” – this should surely read “inverse” not”reversed” .
Mark Stücklin says:
Yes Anne, you are right. Inverse would be a better translation.
Nope- still not buying it- not least because he shoots himself in the foot with his own arguments.
1. “With low rates, the value of properties increases over the historic average, and today we have the lowest rates ever.” If this was true then why haven’t prices been going up over the last few years of “historically low” interest rates?
2. Interest rates are at a historical low- but they will return to normal as the wider EU economy picks up. So mortgages will get more expensive and will once again eat into people’s disposable income- which in turn reduces expenditure into other parts of the economy. With such high unemployment salaries in Spain will remain low and will probably continue to drop in real terms so that will severely reduce the buying power of locals.
3. “a quarter of the market is in hands of foreign buyers with considerably higher incomes”. As he also points out that “the key is not in analysing this figure but its geographical distribution,” With the possible exception of Barcelona, foreigners buy in precisely the areas where the unsold housing stock is at it’s highest. Russians aren’t moving to the Basque country in numbers any time soon. They are buying second homes on the beach, not newbuilds on the outskirts of Madrid. In any case, the number is a quarter, not because there’s lots of foreigners buying, it’s because so few locals are buying. Therefore the number of foreigners buying will go up if the the rest of Europe continues picking up, but not at anything like the rate needed to drive up prices other than those few pockets. What drives prices is locals buying- and as I point out above and below- they’ll not have the money to do so.
4. “the mere 35,000 properties started during 2014 are a just a third of those built during the recession in 1959, when Spain had 20 million fewer inhabitants”. It also didn’t have 600,000 unsold properties lying around empty. It was going through the post war population boom though, and property was cheap relative to income.
5. If the number of new build properties goes from 35,000 to 200,000 then the ratio of houses built to sold will go from 0.25 to 1.4 – i.e. more properties will be being built than being sold- i.e. precisely the mess that got us here in the first place. Of course if the number of buyers goes up then that ratio will drop. Assuming parity is the best thing then we need the number of buyers to go up from 140,000 to 200,000 as well, which is a 42% increase! Really? Where are these buyers coming from? And why aren’t they buying the 600.000 properties that are already on the market?
6. The adjustment has not been “ridiculous”. By definition it cannot be. It can be “large” or even “huge”- but it’s not ridiculous. I’m not just talking semantics here. My point is that for some reason many people seem to think that price rises of 10% a year are “normal” but drops of the same amount are “impossible” as if “property prices must rise” is some sort of law of nature. That really is ridiculous.
While I’m here can we just get over blaming the banks for not giving out mortgages? Banks WANT to to give out mortgages- it’s how they make money! The point is they don’t want to LOSE money- which is precisely what will happen (again) if they give it to people to buy houses they can’t afford, and which lose value over time.