Why Are So Few New Homes Being Built In Spain?

20 October 2017 – Invertia

The construction of new homes is recovering very slowly and proof of that are the 65,000 new homes that were started in 2016; but whilst that figure exceeds the levels seen during the first few years of the crisis, it is still a long way below the 700,000-800,000 homes that were started each year during the real estate boom, which saw builders start work on 1,000,000 units at its peak. The question now is why are so few residential developments being started in Spain?

Paloma Taltavull gives some clues as to why so few homes are being built in her article “The housing sector: now and in the future”, published in the Economic Information Notebooks by the Foundation for Savings Banks, Funcas. In it, she analyses the current housing situation, paying special attention to prices and explaining the reasons why rental prices are growing significantly, even though house ownership prices are not. Ultimately, she concludes that “an increase in the supply of rental homes, or owned homes, is the element that could eliminate the tension in the residential markets in Spain”.

Taltavull, Professor of Applied Economics at the University of Alicante, considers that at the moment, sufficient demand exists to start building 200,000  new homes. She thinks that “the absence of sufficient property developers is slowing down the processes to build new homes, despite the recovery in demand”, given that “the sector suffered badly during the crisis, with a high proportion of construction and property developer companies being destroyed”.

“One of the effects of the crisis that still hasn’t been resolved is the destruction of the production fabric, which comprised a high percentage of small- and medium-sized companies, which gave the market a great deal of flexibility”, explains Taltavull (…).

The Funcas collaborator points out that, currently, there is an insufficient network of house builders because they have disappeared, stressing that the small property developers that remain have not yet recovered their confidence, whilst the medium-sized and large companies do not have the capacity to construct very much.

The professor also highlights that “the price incentive is not giving a strong enough push to the construction sector”, given that although “there is surplus demand”, “credit is not flowing” because of the labour market and the decrease in wages, which is a logical reaction by the financial institutions. Paloma Taltavull points out that this problem is particularly acute amongst young people, who “have been mistreated in terms of salaries for a decade”, given that they are the largest cohort demanding homes, but they do not have the ability to pay and the banks will not grant them loans”.

The expert warns that a lack of new housing in the ownership market and an insufficient supply in the rental sector is driving the significant rise in rental prices that are currently being recorded. She considers that a “mix” between the construction of new homes and other measures to promote rental at a break-even point would be ideal. She adds that the Administrations have an important role to play, given that public housing policy is “absolutely key both for revitalising developments in areas that need them and for avoiding poverty”.

The professor thinks that the public initiative could push the private one, especially in the construction of the type of housing that people need, given that they would be adapted to their ability to pay (…).

Original story: Invertia

Translation: Carmel Drake