When analyzing the data which explains the 8% Spanish housing market increase, it is relevant to focus on the basis of price determination: supply and demand
Last week, the College of Registrars reported a repeated housing price index increase of a 7.7% nationwide. Of the many house price indicators, repeated housing sales is one of the ones with the highest statistical quality, because it only registers the purchase price of the same property, so it isolates us from variations in prices (the price of a house in Madrid is not the same as that of a house in León, hence these adjustments must be made). The Case-Schiller methodology was developed in the eighties by US Nobel Prize winner Robert Schiller, and was reflected in the US housing price indicator, the SP Case Schiller, the index most followed by the market due to its representativeness.
On the supply side, the production of new Spanish housing, at some 42,000 units, continues at historically depressed levels. Thus, Spain has built an average of 244,000 houses per year during the last 20 years, and at the market peak, reached 647,000 houses per year. On the other hand, the inventory of empty houses has been reduced, not only in absolute terms, but in many representative provinces in population (Madrid, Barcelona, Valencia, Seville, Vizcaya, Malaga…). The inventory of empty new houses is below the historical average, that is, it has disappeared in economic terms.
On the demand side, the purchase and sale of houses is already at a rate of 15% per year, chaining three years of increase. 87% of purchases are made by Spaniards, who request more housing for various reasons.
First, housing has become an attractive investment asset due to profitability (the sum of the increase in the price of the house and the rental yield, which ranges between 4% and 6%); due to its limited risk, because it is still at reasonable prices, as I will explain later; and its investment alternatives, since the vast majority of alternative assets are in an economic bubble.
Second: the creation of employment results in greater demand capacity, and in general, the reduction of unemployment is a good indicator to predict the price of housing, since both move with inverse correlation (less unemployment equals rise in prices of houses).
Third, the appetite of households to buy a house rises when salaries begin to rise; in which a stock market of retained demand begins to be released during the years of crisis; when family balance sheets are healthy (today, Spanish families present an enviable balance); and when there is good access to financing, that is, an abundance of mortgage loans at optimal prices, both at variable interest, which represents 60% of the new mortgages, and at fixed interest, the remaining 40%.
Little supply and high demand leads to the rise in the price of any asset, in this case, Spanish housing
Foreign demand has been experiencing consistent increases for years, to the point that the percentage of foreigners buying housing in Spain has tripled, reaching very significant dimensions in provinces such as Malaga, Barcelona and Alicante. Spanish housing is an attractive investment (on average, around 1,600 euros per square meter) for foreign buyers, mostly Europeans, who enjoy an average rent a third higher than ours.
Little supply and high demand results in the rise in the price of any asset, in this case, Spanish housing. The obvious question that is generated is, do we face a bubble like those that are evident in other assets? In my opinion, the answer is no, due to several factors.
On the one hand, it can be said that the housing sector is in a bubble, if the price paid for it, in years of household income, is above the historical average, or if the percentage of family income that is spared to buy a home is above the historical average. In both factors, it can be concluded that we are not in bubble territory. On the side of the mortgage offer, it is true that Spanish banks provide some 40,000 million euros of financing in new mortgage loans, but this dimension is very small if we take into account that in 2007, 180,000 million were granted in mortgages.
Together, the new mortgages are growing at 20%, but the outstanding mortgage balance continues to decrease (we repay more money on mortgages than the new ones that are granted). In addition, and very important, today we buy homes with Spanish savings, and we have about 20,000 million euros (2% of GDP surplus) to repay external debt and channel our savings to the rest of the world, while in 2007 we bought houses with an indiscriminate volume of foreign savings, which translated into a grotesque current account deficit that reached 10% of GDP, that when it was cut off caused, among other things, the enormous crisis.
The recovery of the housing sector is great news for our nation. It leads to strong job creation, more tax collection, which will help reduce the deficit, increase consumer confidence, clean up bank balance sheets, and more. The improvement in the residential market will help Spain continue to lead the growth of large Western countries as the recovery is felt among millions of families.
The ECB should respond by limiting the percentage of the purchase price of a house that can be financed by a mortgage below 80%
However, it is not convenient that we neglect ourselves. Several years of price increases above the rise in rents can generate a new bubble, especially if we finance it with foreign savings. It follows that if this situation were to occur, three or four years before, the supervisor, in this case the European Central Bank, should respond with macro prudential measures. In a nutshell: limiting the percentage of the purchase price of a house that can be financed by a mortgage to below 80%… something that already begins to happen in Australia.
But that will be for a few years. Now it’s time to take advantage of this good juncture and congratulate ourselves, because it would not have been possible without the enormous national effort of families and companies that have allowed Spain to get out of its worst crisis.