3 February 2015 – Expansión
REAL ESTATE RECOVERY / The return of banks to the mortgage market and the increase in domestic investment are allowing Spain to emerge from the deepest and most intense crisis to hit the housing market in decades. During 2015, 440,000 homes will be sold, 20% more than last year, but far fewer than the 950,000 transactions recorded in 2006. Some of those currently renting properties will now purchase their own homes, thanks to the low interest rates.
Happiness yes, cause for celebration, no. The party ended in 2007 and there is no prospect of it returning, in either the short or medium term. Nevertheless, despite the high levels of unemployment (5,457,700 people were out of work at the end of 2014) and the low wages earned by a substantial part of the population (7,861,844 employees declared monthly income of less than €967.94 in 2013), the recovery of the housing market will become a reality in 2015.
And we will not only see green shoots, but rather an upwards trend that will be consolidated over the next few years, since the main variables in the housing market (number of sales, prices and new builds) will perform better in 2016 and 2017 than during 2015. Therefore, 2015 will be the year in which the deepest and most intense crisis to hit the housing market in decades, which battered the housing market in Spain for 7 long years, finally came to an end.
The recovery will be significant in terms of the number of transactions, which will increase by approximately 20% with respect to 2014. Thus, if sales in 2014 amounted to approx. 365,000 homes, in 2015 they will be close to 440,000. Although we expect there will be approx. 75,000 more transactions than in 2014, this figure will still be 500,000 below the one recorded in 2006 (when 955,186 homes were sold – the highest number of sales ever made in Spain). Furthermore, the figure will be less than the number of sales made in 2009 (463,719 homes), a year when GDP fell by 3.6%. But that was, undoubtedly, a very different environment to the one we are now facing in 2015, with economic growth forecasts for the year of 2.2%.
The increase in the number of transactions will mainly take place in the large cities and especially in the streets where the wealthiest populations live (the upper and upper-middle classes). In those areas of Barcelona and Madrid, sales growth will be dramatic, exceeding the levels recorded in 2014 by almost 50% in certain cases. The main reasons for this differential behaviour with respect to the rest of the country, aside from the higher wealth and monthly earnings of residents will be: an increase in the desire to invest in housing; an improvement in the ease of access to mortgage lending; and the existence of a considerable latent demand for housing from people who have lived in rented properties until now. Sales will also increase in provincial capitals, tourist areas and small towns (those with fewer than 20,000 inhabitants), although at substantially lower rates.
Why will the demand for housing increase?
The main reasons why the demand for housing will increase considerably are:
a) Growth in mortgage lending. Having passed their stress tests, financial institutions will increase the loans they grant as they face reduced opportunities for generating profits from the purchase and sale of public debt or the disposal of non-core assets. This means that mortgages will become a ‘hook’ product once again, i.e. they will be designed to focus more on attracting new clients or retaining existing clients, than on generating large margins per euro borrowed.
This phenomenon will lead to an overall reduction in the spread over Euribor to 0.75% and the appearance on the mass market of 35-year mortgages. On a selective basis, we will also see the return of loans for financing house moves (when a client first buys his new home and then sells his old one), as well as those granted for 100% of the value of the home for properties that are not owned by the bank.
In light of all of this, unlike in 2014, when credit granted to families to purchase homes decreased by around 3.5%, lending will increase by approximately 8% in 2015. Undoubtedly, this will represent a substantial change that will result in a return to normality for mortgages used to finance home purchases.
b) A substantial increase in the number of domestic investors. Neither the Russians (of whom there will be more sellers than buyers in 2015), the British or the Germans will be the leading players in 2015; the main players in the market will be Spanish. The expectation of the recovery in prices, the high volatility of the stock market, the low nominal returns offered by bonds over the short term and the risk of incurring losses over the long term will all cause investors will return to the housing market.
Acquisitions will predominantly be made in the areas where investors reside (a classic real estate investment) or in the centre of cities, with only a small percentage of buyers preferring to acquire a residence on the beach or in the mountains. Despite the attractive prices (in some cases less than €60,000), almost no one will purchase in small towns. The main reasons are: the extreme difficulty of renting out homes purchased in such locations, given the huge over-supply and the population declinethat many of them have suffered, as well as the poor prospects of any appreciation in the value of such assets in the short and medium term.
c) The displacement of some of the demand for rental towards purchasing. In recent years, many families have chosen to rent (rather than buy) in the hope that: house prices would fall further; the uncertainty surrounding their future in the company they work in would diminish; and they would manage to save the capital required to put down a deposit on a house, which banks do not normally finance. Nowadays, many of them believe that house prices are going to go up rather than down in the near future, they see redundancy at work as a less likely prospect and after years of saving, they are now in a position to be able to buy their dream home.
Furthermore, given the historically low Euribor rate in December 2014 (0.329%) and the expectation that the ECB’s reference interest rate will continue at a very low level for at least the next three years, they note that it is now much more advantageous for them to buy a property rather than rent. The reason is that the monthly interest payable on mortgages taken out now, will be lower than the rent charged for a similar home, in the vast majority of cases.
d) The macroeconomic recovery. Economic growth of 2.2% will generate an increase in profits for a significant number of self-employed people and small business-owners. This will cause some of them to decide to move house or invest in an additional property. However, the creation of more than 350,000 full time equivalent jobs (under the national accounts methodology) will have a minor impact on the demand for housing, since the vast majority of the roles generated will be temporary or part-time and will be poorly paid.
Overall, house prices will increase by around 5% across the country, and the key driver will be the significant increase in demand in the large cities. The highest annual increase will be observed in the best areas of Barcelona and Madrid, where it will exceed 10% in some cases. In the tourist areas that are furthest from the beach, ski resorts and in the neighbourhoods of provincial capitals, where there is already a significant over-supply of properties, no price rises are expected. Activity will return (in terms of the number of transactions) in these locations, but prices will remain stable.
In some small towns, prices will continue to decrease, although at a significantly lower rate than in recent years. The decline in population numbers, low rental yields (less than €200 (per month) in many cases) and the inability of most of the population that live in rental accommodation to obtain a mortgage, mean that demand for housing (in small towns) will continue to remain very low, although it will be higher than in previous years.
According to the historical data provided by the Ministry of Development, the 5% price increase means that by the end of 2015, the average cost of an unsubsidised home will be roughly equal to the prices last seen in the second quarter of 2004. This comparison clearly shows the significant decline that house prices have suffered during the crisis; specifically, house prices fell by 42.8% between the first quarter of 2008 and the third quarter of 2014. Nevertheless, due to the large speculative bubble in the housing market in 2007, this statistic does not indicate anything conclusive about whether homes now are cheap or not.
In theory, this aspect should allow us to clarify the indicator known as the ‘degree of effort’, which measures the percentage of the salary of an average family (i.e. the one that has an equal number of families earning more and less than it) that is spent on mortgage repayments. This effort, according to calculations published by the Bank of Spain, currently amounts to 35%, which is lower than in September 2008 (41%), but much higher than in December 1990 (20.2%).
My interpretation is that for many families, especially for the majority of those who earn less than €2,500 a month, buying a house is just not an option. By contrast, for those that have accumulated significant wealth or earn a relatively good salary, housing is currently a cheap asset.
In 2015, developers will begin the processes required to build around 65,000 homes. This figure represents an increase of 60% on the previous year (40,000 in 2014), but nonetheless represents less than 10% of the number of new builds that were expected to be built in 2006 (915,745 homes) and does not represent even a quarter of the number of new homes that should be built in any given “normal” year (350,000 homes).
Unlike in previous years, if a plot of land is well located, banks will provide loans for construction on it to finance around 80% of the total cost of the development. Some entities may even begin to partially finance the purchase of plots of land in the best areas of large cities.
Despite this positive outlook, it is likely that none of the next few years will be considered as “normal” years in terms of house construction, since the huge over-supply of homes in many small towns; in quite a few medium-sized towns; and in numerous tourist areas, will hamper the construction of new homes in 2016 and 2017, with fewer than 175,000 being built each year.
In summary, 2015 will see the beginning of a recovery in the housing market and this will result in a period characterised by moderate price rises and significant growth in terms of the number of transactions. Nevertheless, during the coming years, both variables will continue to remain well below the figures achieved in 2006 and 2007.
Therefore, no one should confuse the recovery that is now beginning with the birth of a new bubble.
Original story: Expansión (by Gonzalo Bernardos, Director of the Masters Program in Real Estate Advice and Consulting, at the University of Barcelona)
Translation: Carmel Drake