House Prices: How Much Upwards Wiggle Room Is There?

13 June 2017 – El Mundo

In many respects, the housing sector has been restored to its former glory: house sales are rising at an increasingly faster rate, the development of new homes has resumed and the granting of mortgages is growing apace. However, the jubilation in the residential market can be felt, above all, in the significant increase that prices are experiencing in the new real estate cycle.

House prices rose by 7.7% in YoY terms during the first quarter of 2017, according to Real Estate Statistics from the College of Property Registrars. In the historical series published by that body, that figure represents the highest increase in house prices since 2007, in what is now the third consecutive year of increases in the market after seven years of severe decreases. (…).

The Registrars highlight the favourable behaviour of the real estate and mortgage markets, but warn that this strong dynamism “does not justify any intensification of growth towards double digits anytime soon”.

The registrars reiterate in their analysis that “From a global perspective, the market is debating between sustainable growth and an intensification towards forgotten figures”. They attribute the significant increase in house prices to the consolidation of economic growth, creation of employment, low interest rates, activity in the mortgage market and overseas demand.

The main consequence of the variables listed by the registrars, which work in favour of rising prices is, clearly, the increase in the number of potential buyers of homes, as highlighted by Julio Gil, Managing Partner at Horizone Consulting Inmobiliario. “The factors that are driving the appreciation in house prices nowadays are demand-driven, with three very clear facets: pent-up demand from previous years, which is now coming into play, demand to reposition and demand to invest”, reflects Gil. (…).

Moreover, all indications are that prices will continue to rise, at least, in the medium term (…). What is not so clear is the intensity of that increase. (…).

According to the registrars “Our predictions are based on forecasts of moderate growth rates, defined to be YoY rates of around 5%-6%, although there may be cyclical periods of more intensive QoQ rates. It would seem that “the social and economic reality does not justify an intensification much greater than these amounts”. And they highlight: “The evolution in terms of the number of inhabitants, wage levels, the outlook in terms of interest rates etc. ought to put the brakes on the upwards trend, to a certain extent”.

That prediction is not shared by Gonzalo Bernardos, Economist and Director of the Masters in Real Estate Management and Development at the University of Barcelona. “House prices will rise by around 8% in 2017 if the net credit available to purchase a home does not increase; and will soar by around 13%, if lending rises by 5%”. For the time being, this expert does not see an obvious risk of a bubble and recalls that that only happened a decade ago after net credit had been increasing for 10 years by almost 20%. (…).

Looking ahead, Bernardos takes it for granted that the steep rise in house prices will be contained when the price of money increases (it currently stands at 0% in Europe). He calculates that, provided nothing changes in the international environment, this turning point in interest rates will happen at the end of 2018, which means that by 2019, the average YoY increase in house prices will be sustained at around 3%-4%-5%. (…).

Original story: El Mundo (by Jorge Salido Cobo)

Translation: Carmel Drake