College of Registrars Creates New CPI Indicator for RE Sector: the IRAI

4 December 2017 – El Confidencial

The recovery of the real estate sector is now a reality that nobody doubts. In fact, activity in the sector in Spain has been growing in a sustained way since 2014, far from the minimum levels of 2013, but also a long way from the peak heights. The volume of – new build and second-hand – transactions is rising; more mortgages are being granted; property prices are recovering; and new build permits are increasing. Moreover, the number of companies linked to the sector filing for creditor bankruptcy is also decreasing. Each one of these parameters has its own indicators proceeding from different sources (e.g. Spain’s National Institute of Statistics (INE), real estate websites, appraisal companies, Ministry of Development…), that show the evolution of those specific parameters.

Nevertheless, from now on, there is going to be a new indicator that groups them all together and, through a complex weighting system, shows the overall evolution of activity in the real estate sector. This new indicator is the Real Estate Activity Registry Index (IRAI), compiled by the College of Registrars. According to its creators, it is set to be called the CPI of the real estate market, given that its preparation adopts a very similar methodology to that used by INE to measure inflation.

The indicator takes the year 2003 as the base year (100); it serves as the reference for analysing the evolution of real estate activity. In this way, for example, during the third quarter of this year, the IRAI amounted to 98.26% points, 30% below the maximum levels of 2007, the year the real estate bubble burst. During the first 3 months of that year, the index reached its maximum, 139.90 points. Nevertheless, since the historical minimum of 68, to which it fell in 2013, the sector has risen by 45% to date. Like in the case of CPI, the IRAI can be softened or purified to avoid seasonality, in which case, it amounts to 94.34 points.

This new index is a synthesis of different indicators. It includes real estate transactions, mortgage financing and, in addition to the above, another set of commercial activity indicators, such as the number of company constitutions, economic variables from filed annual accounts and bankrupt companies, in all cases relating to the construction and real estate sectors. For its launch, the College of Registrars has constituted a Committee of Experts, advisors from the college in each aspect listed above, who have been responsible for preparing the index and determining the weighting of each one of the indicators in the index. The IRAI will be prepared on a quarterly basis (…).

Evolution of the IRAI so far this year

The variation in the IRAI since January has been an increase of 10.12%, representing the cumulative impact of the ownership element (9.55%) and the commercial element (0.57%). In other words, the part corresponding to house sales and financing has pushed up the index by the most, compared to the boost from commercial activity. In December last year, the IRAI amounted to 89 points, compared to 98.26 now.

In this way, the groups with the greatest positive cumulative impact so far this year have been sales (cumulative impact of 6.98%) due to the significant rise in the number of sales (cumulative impact of 6.11%), especially of new and second-hand homes with growth rates of 31.87% and 27.06% and cumulative impacts of 1.19% and 4.14%, respectively.

Sales prices also grew by 3.74% (impact of 0.87%) with the price of second-hand homes having a greater impact (impact of 0.9% with a growth rate of 5.91%). Meanwhile, mortgages (cumulative impact of 2.56%) due to the significant increase in the number of mortgages (cumulative impact of 2.05%), especially for new and second-hand homes with growth rates of 21.65% and 15.42% and cumulative impacts of 0.92% and 0.94%, respectively.

From the commercial perspective, the greatest boost to activity has come from the decrease in the number of creditor bankruptcies involving both construction companies, which have decreased by 83%, and real estate companies, which have fallen by 57% (…).

Original story: El Confidencial

Translation: Carmel Drake