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A new property bubble?

José García Montalvo
José García Montalvo

In a recent article in the spanish daily El Pais, and following news that Spanish house prices are on the rise, property market expert and economics professor José García Montalvo explains why there is no reason to worry about a new spanish property bubble inflating, at least for now.

“News that house prices have risen by 4% has awoken ghosts of the past,” writes Garcia Montalvo. “It’s not unusual to hear talk of a new “ladrillazo” (property bubble). But the reality of today’s property sector is very different. It’s true that many indicators are growing by double digits, but it seems the property industry is just returning to normality after years of very depressed activity.”

Spain has been socially and economically traumatised by the last real estate boom. Garcia Montalvo runs through his arguments why it’s premature to talk of another bubble.

Boom years on the Costa del Sol
Boom years on the Costa del Sol
1) Home sales are rising by more than 10%, but that still leaves them at just 41% of the level reached in 2007.

2) New housing starts are up 15%, but they are still 95% below the level of 2007.

3) The construction sector has created 125,000 new jobs in the last year, but that compares with 1.7 million jobs lost since the crisis began. The sector has gone from 14% of all employment to just 7%.

4) If mortgage lending is increasing, won’t that drive up demand and prices? Garcia Montalvo points out that, although new mortgage lending is growing by an annual rate of 22%, this is happening off a very low base. And there is no risk of another credit-fuelled housing bubble whilst banks continue to demand high deposits and creditworthiness, as they are still doing. Furthermore, it also looks like lenders are erring on the side of caution with their valuations, which also reduces the risk of a new bubble.

5) The pipeline of new developments is starting to fill up again, after years characterised by little new development. The new homes coming onto the market will be very competitively prices, thanks to massive write downs on land values. That should help to contain price pressures in future, at least partially.

6) The existing glut of new homes will also help to keep a lid on prices, says Garcia Montalvo. There are still 540,000 new homes on the market (built but never sold), even if 30% of them (162,000 homes) are located in areas with no demand.

7) After years of falling house prices, can spanish families now easily afford to buy a home? asks Garcia. “The answer is still no,” he says. The housing affordability ratio is still high at 6.3 years of net household income, because although house prices have fallen, so too have incomes, preventing the affordability ratio or returning to a sustainable level of between 4 and 4.5 years income. On the bright side, he expects the affordability ratio to improve if the economy keeps on growing, and the recovery is not killed off by spain’s politicians.

Spanish house prices might have risen by 4% in the last year, but they are still 33% below the peak. It’s still way too early to talk about another property bubble, concludes García Montalvo.

Adaptation and translation of an article published by El Pais. 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): ¿Nuevo ladrillazo?

José García Montalvo is an Economics professor at the University of Pompeu Fabra

For a more upbeat opinion on where the market is heading, read Why are spanish house prices rising?


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