An uptick in housing prices and home sales is good news for Spain’s housing industry, and it is translating into an improved medium-term outlook for the construction sector and the country’s economy as a whole.
Spain is seeing a progressive stabilization of the housing market in the short term that is supporting a slow but ongoing economic recovery for one of the nations hit hardest by the recession in Europe. Housing prices began to rise in Madrid in May for the first time in four years. During the same month the Basque Country, Cantabria, and the Balearic Islands also recorded an annual rise in prices for the first time in six years.
This upward trend continued into Q2, when housing prices increased by 0.8% year over year — the first annual increase in six years. This news suggests that the Spanish housing market is slowly recovering. Plus, at least two factors point to an improving medium-term outlook: The number of property transactions is increasing (albeit from a low base) and so are mortgage originations, which rose by 19% in Q2 (the latest data available) compared to the same time last year.
The recovering housing market also is driving an improving medium-term outlook for the Spanish construction sector. The latest data from Eurostat reveal that in Q2 the building sector grew by 7% year over year, recording the highest growth rate in the EU. Spain also recorded a 6.8% year-over-year rise in construction, the fourth-strongest figure in the 28-member bloc.
In particular, construction of new housing is flourishing in “niche areas” like Avaraka on the outskirts of Madrid. The “ripple effect” of combined recovery in the housing market and the construction sector is likely to be substantial, given the strong multiplier effect the sectors have through the whole economy.
That said, a full-fledged housing recovery is still some time off. Despite being 30% to 40% below their precrisis levels, home prices are still high relative to Spanish families’ average income. Indeed, buying a house currently requires six times the combined annual income of an average family. As a result, notwithstanding record-low interest rates, housing demand looks set to remain relatively subdued in the short term.
Furthermore, Spain faces a large property overhang — the national statistics office reports that some 768,000 houses built between 2002 and 2011 remain empty. This situation is likely to constrain any substantial increase in house prices in the short term.
In regard to bank credit for home purchases, lending conditions will remain tight well into 2015 as the ratio of bad loans to total loans is still high (albeit decreasing). The latest official data on bank lending are broadly consistent with this view: Bank credit for home purchase and renovation fell by 4% y/y in Q2 as a result of bank reluctance to extend credit to any but the safest clients and domestic firms.
Overall, the Spanish housing market seems to have bottomed out and be primed for a recovery. However, given housing’s tendency to lag behind the business cycle, as well as Spain’s still unsupportable labor-market conditions and cautious bank lending, the beneficial effects of an improved housing market on the real economy will be fully felt only in the medium term — not in the coming quarters.