Economic Research: Spain’s Housing Market May Need Four More Years To Rebalance

House prices in Spain are a key variable in the performance of the country’s economy. The housing boom built up unsustainable imbalances, such as an oversupply of dwellings, which will need to fully correct before a sustainable recovery takes place.

The unwinding has begun: House prices have dropped 22% in nominal terms between first-quarter 2008 and first-quarter 2012, according to the Organization for Economic Cooperation and Development. That’s more than in any other eurozone country except for Ireland. However, the magnitude of the decline has to be juxtaposed against the 150% rise in prices in Spain between 2000 and the peak in 2008. We note that prices climbed 116% in Ireland and 60% in the eurozone on average over the same period.

A look at each of the major trends affecting Spain’s residential real estate market–the housing overhang, household debt, housing price ratios, and unemployment–indicate that the correction is likely to take up to four more years. In addition, price fundamentals show that a further 25% drop in housing prices could be in order.
Overview
  • For Spain’s housing market to recover, household debt, which is still high, needs to come down further, implying years of weak credit demand.
  • Because of the heavy weight of unsold housing stock, we believe that the correction in housing prices is likely to be deeper and more prolonged than in the previous cycle, taking up to four more years for the market to absorb the glut.
  • A look at fundamentals–price to income and price to rent ratios–leads us to expect a further 25% drop in housing prices.
  • Investment and employment in the construction sector is now down to 12.7% and 6.8% of GDP, close to half of 2006 and 2007 levels, respectively.
  • The bursting of the real estate bubble is visible in Spain’s dire economic prospects: Standard & Poor’s expects GDP to contract in real terms by 1.5% this year and by 0.5% in 2013.

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