Fitch Points to Real Estate Bubble in Central Madrid and Barcelona

24 October 2017

The Spanish property market and the sharp increases in housing prices in the principal Spanish cities have already triggered alarms

The Spanish real estate market and the sharp price increases recorded in major Spanish cities are triggering alarms. The rating agency Fitch was the first voice to take a position on a question that has been looming for several months: is the market just frothy or are we facing a full-blown bubble?

Fitch’s opinion on the matter is clear. The agency is warning of a bubble in the centre of Spain’s principal cities, though it adds that it does not foresee a generalised bubble in house prices in the country in the short term, due to the high ‘stock’ that must still be absorbed and the restrictions to the purchase of homes.

Just to get an idea, recent data from the valuation firm Tinsa shows how housing prices increased by 20.6% in Barcelona and 15.5% in the capital of Spain in just the last 12 months. These percentages hark back to number last seen in Spain’s pre-crisis boom years.

An analysis of the housing sector in Spain, published on Tuesday by the company, explains that bubbles in specific types of highly localised assets are already evident. Fitch highlights how high demand and limited supply in the housing market in the country’s principal cities are causing severe increases in prices, which are increasingly “unsustainable.”

As noted, annual growth in housing prices of between 15% and 35% have been limited to prime neighbourhoods in Madrid and Barcelona. Fitch believes that this demand has been underscored by quantitative easing, buying by foreigners and investment decisions, as investors look to benefit from asset appreciation and rental yields. However, the ratings agency does not believe that all this mix of  “ingredients” will influence the general real estate market in the short term.

Fitch says it is “highly unlikely” that problems in the real estate market are correlated with the economic recovery

Similarly, the agency asserts that it is “highly unlikely” that the problems in the real estate market are correlated with the economic recovery in general, and foresees that the average sale discounts of foreclosed homes will remain high and stable over the next few years.

This situation will continue as long as the banking sector continues to unload its excess of stock of houses and while buyers insist on deep discounts when acquiring foreclosed homes, the rating agency emphasised.

According to Fitch data, discounts on the sale of foreclosed flats remains “high”, up to 60% on average in relation to the initial valuation, with a range of between 50% and 75%. The dispersion of discounts on the sale of foreclosed properties is shrinking. In fact, the gap between discounts from one end to the other has been reduced to 25 percentage points at the end of 2016, from 35 percentage points in the period between 2010 and 2011. However, the agency advises out that the correction is not generalised.

Difficulties accessing housing

On the other hand, Fitch explains that access to housing will continue to be complicated because the increase in the housing price index exceeds wage adjustments.

Thus, the capacity of families to acquire property is decreasing, also due to a labour market that favours temporary rather than indefinite contracts, leading to difficulties in making the initial 20% deposit required to purchase a home.

It also underlines that access to housing in the long term may be limited due to the gradual elimination of monetary stimuli in the market and the likelihood of higher interest rates.

Original Story: El Confidencial

Translation: Richard Turner