The Spanish market is made up of a number of regional markets joined by the two hubs of Madrid and Barcelona. Major business activities occur around these two cities. All transactions are conducted in the Euro. Spanish society as a whole has a preference towards ownership of real estate. The real estate market in Spain drove a greater portion of the service sector contribution to GDP followed by construction as part of the service sector (Deutsche Bank Research, Sept. 2007). The most widely used housing market statistics for property prices in Spain are the quarterly figures released by the Spanish Ministry of Housing.
According to Deutsche Bank Research (Sept. 2007), the housing sector over the past decade experienced a tremendous growth with housing prices rising by almost 200% and construction investment rising by 6. 5% per year since 1998. There were 800,000 completions every year, this figure was more than Germany & Italy combined. Residential investment per GDP had reached 8. 1% in 2006 which was more than Germany, France, and Italy combined. Also the share of residential investment in terms of GDP reached 8. 1% in 2006, up from 5. 1% in 1994 and well ahead of Germany’s 5 1/2%. By all measures this was a red hot market.
Chart to the left and according to Housing figures from the Ministry of Housing, property prices rose by 4. 8% on average in 2007, down from 9. 1% in 2006, and considerably below the high of 18. 5% in 2003. If you adjust for inflation, however, Spanish property prices only increased in real terms by 0. 6% in 2007. Demand One way we can measure overall demand is to look at numbers that are published by the Spanish Property Registry. According to the figures, the market shrank by 9. 3% in the first 9 months of 2007, and by 12. 11% over 12 months to the end of September 2007.
Registered property transactions over 12 months to the end of September 2007 fell to 830,605 sales compared to 945,042 a year before. Just looking at the third quarter of 2007 (the latest period for which information is available) the fall in sales was even more pronounced. Compared to the same quarter in 2006, registered property transactions fell 15. 8% from 224,055 property transactions to 188,256. The largest falls on a regional basis were in Catalonia (-34%), the Balearics (-32%), the canaries (-26%), and the Valencian Region (-21%). The smallest falls were in Madrid (-2%), Andalucia (-4%), and Asturias (-10%).
The only region in which property transactions increased was Cantabria, in the north of Spain, where the number of transactions increased by 13% compared to the same period in 2006. Another indicator were the sales figures of developers. Developers’ sales fell by between 40% and 70% in 2007, with the fall accelerating towards the end of the year. Taylor Wimpey, a British developer with projects in Spain, has reported Spanish sales were down by 44% in 2007, Supply On the supply side, planning approvals recorded by Spain’s College of Architects finally started to fall in 2007, having risen to a record 920,000 in 2006.
In the first 9 months of 2007, planning approvals fell by 35% to 494,000, down from 756,000 in the same period of 2006. Over 12 months to the end of September 2007, planning approvals fell 32% to 658,000, down from 965,500 12 months earlier. Figures from the Ministry of Housing show that 432,000 new properties were completed in the first 9 months of 2007, down 3% when compared to a year before (but down 10% if you compare Q3 2007 to Q3 2006). On the other hand, figures from the Ministry of Development (Fomento) indicate that 475,000 new homes were completed in the first 9 months of last year, a 9.
4% increase on the same period 2006. Either way, lower demand has not yet translated into a corresponding fall in the number of newly-built properties coming onto the market. As the market heated up, Spain’s central bank began taking measures to control the level of easy credit by raising rates across the board for mortgages. With the bulk of the mortgages in Spain being variable in nature, those were the most aggressively targeted. (See rate table below) The increased rates began having an impact on immediate borrowers and potential borrowers’ decisions. In addition, the banks began curbing lending activities to the housing sector.
Reviewing the Gross lending graph, the lending amounted to i?? 37,741 million in comparison to i?? 42,293 million in the 2nd quarter of 2006 and net lending was i?? 24,305 million in comparison to i?? 26,069 million in the equivalent quarter of 2006. Moreover, the year on year growth rate in residential mortgage lending outstanding declined further and reached 17. 6% in comparison to 23. 8% in the 2nd quarter of 2006 and 19. 6% in the 1st quarter of 2007. Source: Banco De Espana ( Spain’s Central Bank) Oversupply of properties, lower demand, tightening rate and credit policies, have resulted in higher default curves at banking institutions.
The graphs above shows a progressive deterioration in default rate curves. From household rate curves to the construction and development industries, we can see the most recent periods having the steeper default curves. The increase in interest rates in the past year contributed to the steeper slope of the curves, resulting in higher mortgage costs for owners. As mentioned before, in Spain a greater percentage of mortgages are adjustable rate. The x-axis represents the timeframe in quarters from loan origination date.