The price of housing grew by 4.7% in 2016 and adds three consecutive years to the rise, according to data published Wednesday by INE. The most pronounced price increases were in the communities of Madrid (+ 8.6%), Catalonia (+ 7%) and the Balearic Islands (+ 6.2%). I believe that there is no bubble, but a price recovery after the 'brick bubble' punctured in 2007. The lack of new housing supply and the scarcity of land are the two major concerns in the sector in the face of future increases in price.
The recovery is here to stay.
The recovery in housing prices last year completed a new step. For the third consecutive year here has been a 4.7% increase, according to data published nearly two weeks ago by the National Statistics Institute (INE). Or what is the same, the biggest annual rebound since the brick puncture.
In Spain, talk of record rallies in the real estate wakes up the heebie-jeebies for all the people involved in the construction industry…. including me.
Not a decade ago this country witnessed a tide of unemployed parading the unemployment offices, many of them, belonging to the real estate sector. Many properties, overvalued by the bubble, could no longer be paid for and many people were evicted from their own home. Constructions works came to a complete halt dragging the sector into a deep economic crisis. Now for the first time consecutive positive figures are again showing up in the building industry.
Good news for some..
Statistic has provided us with good news with the closing of 2016: the price of housing grew by almost half the rate before the puncture of the bubble (9.8% in 2007); Housing sales were up 13.6%, mortgages also grew double digit (14%), the average amount borrowed was the highest for a five-year period and employment in construction advanced 4.99%. Industry experts, however, rule out that the bubble is re-inflating.
The Housing Price Index (BVI) that started to calculate the statistics in 2007 reflects both the price collapse since 2007 and the recovery trend of the last three years. Although the price of housing is bullish, but the rise is moderate and constant, for a bubble to occur, sales prices should be high, but the housing is still cheap and many are sold at a cost or with a slight profit margin.
We have to remember that in 2007 licences were requested to build 867,000 houses ... but since then only the embers of that figure are left. The brick puncture reduced licences requests to less than 35,000 in 2013 and then grew, to just over 60,000 in 2016. Obviously, if the comparison is made with 2013, licences have doubled. But if the focus is brought to the top of the bubble, they only account for 6% of the applications presented then.
Prices vary on location.
However all the experts agree that the rise depends very much on the geographic location.
Prices are increasing throughout Spain, but in regions such as Castilla-La Mancha by only (+ 0.8%) and Castilla y León (+ 1.1%), in Madrid and Catalonia the average price push of housing in 2016 soared to 8.6% and 7%, respectively. There, all the stock available from the era of fat cows has already been absorbed. In Madrid and Barcelona there is a lack of new construction, housing has not been built for a long time and especially in downtown areas.
This gap is reflected in prices: new housing stock has risen by 6.5%, its highest increase since 2007 and two points more than the second hand (4.4%).
The soaring price of land with planning permission.
We need to build in Spain some 150,000 new homes every year to meet current demand and keep prices from rising. The problem, is that in order to do it, land is needed and in big cities and it does not exist or it is not liberalised by the municipalities. The cost of land with planning permission is a problem in the medium term. The consequence of lack of land dictates the market. Little land to build, and many promoters interested obviously the land goes to the highest paying bidder. The consequence of this is that the square meter of buildable land is soaring and the property developer is going to have to add to the prices the new costs of land to the houses being built in the next two years. Depending on the region a developers, the land accounts for 20% to 50% of the unit cost of their construction. The rest of the cost corresponds to taxes and the production process of construction. But the price of the land, according to the promoters, has grown in 2016 from 40% to 50% on average. In some places it reaches 80%, top places in major towns. The main challenge of the industry is to contain the costs of land and construction, because they are increasing at a pace much higher than the growth of housing prices.