29 March 2016 – Cinco Días
As well as looking at average house prices in Spain, the experts always like to analyse how many people can pay those prices and with what degree of difficulty. Or to put it another way, how accessible housing is for households. In this way, they assess how much potential demand may be left out (the so-called insolvent cohort) and determine whether social housing policies, amongst other initiatives, need to be developed, such as the ones applied since the end of the 1980s.
When it comes to measuring the accessibility of house purchases, there are two, more or less official, ways of doing it, which are accepted by the consensus of analysts. The first involves calculating the percentage of household income that is used to repay the mortgage. At this point, it is worth remembering that for the banks’ risk departments, the monthly mortgage instalment should never represent more than one third of a family’s income. (…).
The critics of this formula point out that this monthly mortgage instalment figure does not include any money that a family would have had to pay by way of deposit, and nor does it reflect the notary or registry fees, or the taxes that are levied on house purchases.
Removal of the tax deduction
Currently, according to the statistics prepared by the Bank of Spain, families spend an average of 32.5% of their incomes on mortgage repayments, which falls in the range considered healthy by the banks. But just before the burst of the real estate bubble, when real estate prices were sky high and the Spanish economy was growing at a good rate in terms of activity and employment, that percentage exceeded 60% of income, excluding tax deductions, and 48% if we include those incentives. Now that difference no longer applies as the Government abolished the possibility of making deductions from IPRF (income tax) for the purchase of a primary residence in 2013.
The other formula..is based on the relationship between the average house price and average salaries, with the resultant ratio understood to represent the number of full years of salary that would be required to pay for the home in full. The experts believe that accessibility is measured more correctly in this way. Moreover…, they established that this ratio should amount to around four years.
In other words, if it is healthy for a household’s monthly mortgage payment to absorb no more than one third of its monthly income, then in full salary terms, the ideal thing would be for it to take no longer than four full years to pay off the house purchase.
The Bank of Spain has been measuring accessibility using this ratio since 1987 and the historical series perfectly reflects how the effort required to buy a home has increased when prices have risen disproportionately.
In this way, since the end of the 1980s until the year 2002, accessibility ranged between three years of an annual salary and four and a half years, which the analysts classified as acceptable; but since then, a much steeper trend has been observed, to reach the series peak with nine full years of salary to pay for a home in 2007. (…). The minimum seen in recent years was recorded at the beginning of last year, at 6.08 years, but the Bank of Spain recorded slight increases in the ratio during the second and third quarters of 2015 at 6.29 and 6.32 years.
The reason is none other than the change in the trend led by property prices, which after accumulating an average depreciation of more than 40% since the end of 2007 (when they reached their peak), have now been rising again for a year and a half. And although the dominator of the ratio (salary) is also increasing, it is doing so at a lower rate than house prices. (…).
Original story: Cinco Días (by Raquel Díaz Guijarro)
Translation: Carmel Drake