30 March 2015 – Cinco Días
It is not easy to measure how robust activity is in the real estate sector. But if there is one indicator that has been taken into account historically to assess the sector’s health, it has been the volume of housing starts. That is where the problems begin. The permits that developers have to obtain to enable them to begin construction work did not always used to correspond to the exact number of homes that were built in the end, and so the gross figure that was published, had to be carefully extracted.
And this market suffers from another peculiarity. Since house building is a slow process, which tends to take between 12 and 24 months, it is not easy to halt developments that are already underway, even once it has been established that most of the homes under construction may not be sold upon completion.
These two aspects help us to understand what has happened in recent years, when we analyse the data for housing starts and completions. If we take the year 2000 as a starting point, when nobody doubted that the real estate market was heading towards a boom of as yet unknown proportions, the number of house starts began to open up a sizeable gap over the number of completed homes, of more than 40%, approximately. The former moved in the vicinity of 500,000 homes, whilst the latter remained at just over 350,000.
Right after that, house production volumes climbed to more than 600,000 per year, spurred on by demand for a primary residence by one of the largest population cohorts in Spain’s recent history (the baby boomers), strong employment and the almost unlimited access to very cheap financing over almost “eternal periods”.
Thus, the gap between the two variables continued to grow until 2008, when everything came to an abrupt end. In fact, that year closed with 264,795 housing starts, when just a year before the figure had amounted to no fewer than 651,427. In 12 months, activity had collapsed by 59%, but the majority of the construction work underway continued to run its course (only a minority of developments were left unfinished even during the worst years of the crisis), which explains why since then, the number of finished homes has exceeded the number of house starts, year after year, for seven years in a row.
Shortage of new supply
In 2014, this trend was almost reversed, but in the end it was not. Last year, construction of 34,873 houses began, which represented a slight increase of 1.7% compared with the figure a year before, but still a long way below the 865,561 homes that developers began building in 2006, during the height of the boom. This means that today, the number of homes being constructed accounts for barely 4.02% of the volumes that were being constructed during the economic boom. Moreover, the figure is slightly lower than the number of homes that were completed last year (46,795), which in turn represented 7.29% of the number of homes that were finished in 2007 (the peak of the series), when 641,419 homes were completed.
All indications are that this year will be the first year that the two curves cross again, in such a way that more homes are started than are completed. In fact, if this does not happen, there could be problems due to a shortage of stock of new homes in places where the stock has already been absorbed and demand is beginning to intensify. Another important indicator for the sector, namely the consumption of cement, also indicates the same trend. During the first two months of this year, cement consumption has increased by 6.6%, to amount to almost 1.6 million tonnes, which corroborates the theory that the cranes are returning, albeit in a selective way.
Another business niche, which is key to the recovery of the construction sector, but which does not seem to stop decreasing is: refurbishments. According to figures from the Spanish Confederation of the Construction Product Manufacturers Association (Cepco), 2014 closed with 22,428 permits for the renovation or refurbishment of homes, down 0.80% on the previous year. And the number of building permits barely grew (rising by only 2.8%).
Original story: Cinco Días (by Raquel Díaz Guijarro)
Translation: Carmel Drake