Home building industry stirs back to life, but little risk of Frankenstein II

In the boom years, home building was the Frankenstein of the Spanish economy, the monster that devoured its creator.
In the boom years, home building was the Frankenstein of the Spanish economy, the monster that devoured its creator.

The Spanish home building industry is showing signs of life after years in coma, but there is little risk it will turn into the Frankenstein it once was.

Planning approvals were up 57% in the first quarter of the year compared to the same time last year, reveal the latest figures from the Government (Fomento). There were 16,782 approvals in the period, handled by the Spain’s Colleges of Technical Architects (next chart).

spanish housing starts per quarter

That’s the highest level of new home building activity since 2011, when there were 21,953 approvals at a time when the building boom was still coming off the boil.

Broken down by type there were 12,425 planning approvals for flats, up 64%, and 4,356 for single-family homes, up 39%. For cultural reasons Spain has always favoured flats over houses, though the preference for flats is getting slightly less dominant in this cycle, perhaps because of the influence of foreign buyers on the market.

Construction is growing most in areas where the inventory of homes for sale is smallest. Madrid leads the ranking up 56% (4,962), followed by Catalonia, up 49% (2,192). Planning approvals are up 35% in Andalusia (2,198), and 21% in the Valencian Community (1,590).

The home building industry started recovering last year, when planning approvals rose by 43%, after 8 years of declines. In 2006 there were 860,000 planning approvals, and 126,753 in September of that year alone. Housing starts then slowly collapsed to next to nothing, with just 34,000 in 2014, when the Spanish home building industry almost ceased to exist. The following chart illustrates how dramatic the collapse has been.

spanish housing starts boom and bust


Signs of life in home building is good news for the economy, as construction is a labour-intensive business that creates jobs, and home sales drive other types of spending like furniture and financial services (insurance, mortgages, etc). But let’s not hanker for a return to the boom years, when the construction industry grew to monstrous proportions, and twisted the Spanish economy out of shape.

Fortunately, there is little chance of another construction bubble, as memories of the bust are still raw. Furthermore, the building frenzy relied on cheap money and deranged lending, which is not the case today….is it? Well, deranged lending hasn’t yet returned but interest rates are negative and money is cheap. Who knows where that leads.

Frankenstein was made of many parts, which was also true of the Spanish real estate bubble. A big part of that monster was the Spanish planning system, which is so unresponsive to market realities that it encourages speculative booms and busts. The planning system is still a big problem (which politicians say nothing about as we approach elections) but not enough on its own to create Frankenstein II.

Meanwhile, planning permission to refurbish homes was up a pathetic 0.5% in the period, after four years of declines in a country where the housing stock is in desperate need of renovation. Why? Because the planning system strangles the business.

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