Has Spain Learnt Anything From The RE Crisis?

17 September 2015 – Mercado Financiero

Standard & Poors published a report at the end of 2007, which predicted a 22% decline in the construction sector over the next 3 years in Spain. A year later, the decrease in the number of job offers in the real estate and construction sectors amounted to 57%.

In the years before the crisis, Spain shared in Europe’s prosperity, where belonging to the middle class was an outmoded concept. Buying a new house, changing car and travelling constituted the basic premises of an economic model dominated by the real estate sector.

During the decade between 1997 and 2007, the construction sector drove more than half of the country’s economic growth, and accounted for 23% of total employment, according to a study by Rafael Doménech, Chief Economist for Developing Countries at BBVA Research.

Specifically, in 2007, construction accounted for 21.7% of the Spanish economy’s GDP. Seven years later, in 2014, the weight of the sector had decreased by almost half, to account for 10.5% of GDP.

No one ever talked about the risk premium; the word eviction was effectively invented in 2008; and purchasing property was a very profitable business, since prices always increased.

Over-valued assets?

Excess demand gradually drove up the price of properties. According to the Bank of Spain, at the end of 2008, the price of a typical home (measuring 93.75 m2) was 6.5 times greater than the gross disposable income of an average household.

That magnitude dissipated during the second quarter of 2008 when house prices began to fall and the declining trend continued until the middle of 2014, when the first price rise was recorded after 24 quarters of decreases.

But the issue goes much further than that. During the years before the crisis, the Spanish economy was characterised by the following: a high inflation differential with respect to the Eurozone; a lack of competitiveness; and the high price of real estate assets that encouraged their purchase. Pillars of growth that IESE described as “unsustainable”.

Growth is returning

In 2015, seven years after the crisis began, the positive macroeconomic outlook seems to be indicating the end of the recession. Such trends are also being seen in terms of house prices, which despite the sharp downward trend, have now reversed. With the 4% increase experienced in Q2 2015, house prices have now recorded five consecutive quarters of YoY increases.

In this context, what we should really be asking ourselves is: Are we at the beginning of a new real estate bubble? Rafael Doménech…says that the spike in house prices during the second quarter of the year (a 4% YoY increase) is “the typical rebound following an over-reactionary adjustment”. Moreover, he is certain that the market is not returning to its old tricks again.

Meanwhile, the Head of Research at the Bank of Spain, José Luis Malo de Molina, says that “the adjustment in the housing sector has, in theory, come to an end” and that “the outlook points to the start of a possible recovery”. Likewise, Malo de Molina believes that the recovery in transactions is leading to an increase in the number of permits for the construction of new homes. (…).

In any case, the Spanish economist Santiago Niño Becerra argues that Spain will never again construct more homes than in France, Germany and Italy put together, because of easy credit fuelled by cheap money. “I think that the future of the real estate sector will centre around the renovation and conversion of properties for rent, together with very carefully planned construction”.

Original story: Mercado Financiero

Translation: Carmel Drake