The demographic trends of a country or population is the main determining factor regarding the long-term structural demand for housing in that country or population. Both variables may differ at certain points in time but notable imbalances may arise when divergence occurs over long periods of time, either due to an excess of supply, which can give rise to a large stock of unsold housing (as happened in Spain in the years before the real estate bubble burst in 2008), or due to an insufficient supply to cover structural demand for housing due to the formation of new households. As we will see in this article, this is currently the situation in Spain’s real estate market and, more specifically, in large cities and some coastal areas.

Starting with an analysis of Spain as a whole and taking a broad perspective in terms of time, the chart below outlines the number of building permits for each new household created since 1997. It shows the construction boom between 1997 and 2007, with an average of 1.6 new homes for every new household created. During this period, residential investment as a percentage of GDP almost doubled: from 6.2% of GDP in 1997 to 11.8% in 2006. This imbalance (oversupply) led to the accumulation of a large stock of unsold new housing, which reached a peak of 650,000 homes in 2009 according to estimates by the Ministry of Transport, Mobility and Urban Agenda.

The need to absorb this large stock meant that relatively little new housing was built between 2008 and 2013, a period that saw an intense adjustment in house prices and capacity in the sector. In 2014, the real estate market began to pick up again, with the first positive developments in terms of price and sales. However, growth in the supply of new housing remained very limited in the first year of this new expansionary cycle because of the still considerably large stock that needed to be absorbed (estimated at more than 500,000 homes in 2014) and Spain’s low population growth (86,000 new households in 2014).¹⁰ Between 2015 and 2019, although household formation remained very low (about 64,500 households per year), the production of new housing gained momentum, rising from 64,000 new building permits in 2015 to 106,000 in 2019. This once again raised the number of building permits per new household created to above 1, despite the fact that the stock of unsold new housing was still very large (457,000 homes estimated in 2019). However, much of this stock is now considered obsolete or is located in areas with very low demand.

In the most recent period (2020-2022),¹¹ first as a result of the pandemic and then due to the rise in construction costs, once again the supply of housing was not enough to meet the demand of a population that was growing more quickly. Consequently, in the past three years about 420,000 new households have been created in Spain¹² but the number of new builds started has barely reached 300,000.¹³ The chart below shows where the lack of supply is most keenly felt in relation to demographic trends: namely, in those municipalities with the highest population growth, such as large cities and some coastal areas.

It is a well-known fact that Spain’s population is distributed very unevenly throughout the country. In fact, geographic differences have become even greater over time as people tend to move to areas with more job opportunities and a more dynamic economy.¹⁴
This phenomenon of even more people moving to highly populated areas creates additional pressure for housing demand in real estate markets that are usually already quite (or very) stressed. For this reason, it would be convenient for residential construction to concentrate on responding to this demand, either by building in more demographically dynamic municipalities or in nearby zones. This latter case may also require means of transport to be developed that can bring some zones closer to others in terms of travel time.

To analyse this issue, we have used a new detailed database of new building permits with their geolocation details,¹⁵ which allows us to cross-reference the exact location of each new housing development with the demographic trends in that zone. Specifically, for each location (municipality or district), we have calculated a metric, which we call the «imbalance», that measures the relative shortage of housing based on a comparison between the cumulative number of new building permits between 2020 and 2022 and the net creation of households over the same period. This metric ranges between +1 and –1. Positive values (closer to 1) indicate the creation of more households than new homes started; i.e. insufficient housing supply, while negative values indicate that construction has started on more homes than the number of new households created.¹⁶

The maps below show the findings of these calculations. It is evident that the municipalities that do not have enough supply of new housing in relation to their household formation are spread along the Mediterranean coast, on the islands and around the large urban centres, especially Madrid (imbalance of 0.42) and Barcelona (0.46) although very high values can also be observed for other highly populated cities such as Murcia (0.53), Terrassa (0.49), La Coruña (0.42), Vigo (0.41), L’Hospitalet de Llobregat (0.40), Sabadell (0.34) and Zaragoza (0.25). Nevertheless, this does not mean that no construction is taking place in these municipalities. Indeed, if we divide the municipalities into those with a housing shortage (imbalance >0) and the rest, we can see that 51% of new building permits in the past three years have been given in municipalities with a housing shortage. However, these municipalities concentrate 61% of Spain’s population and 96% of the country’s new households created between 2020 and 2022. In other words, although a significant part of new housing developments are located in highly dynamic municipalities in demographic terms, this increase in supply is not enough to cover the booming demand.¹⁷

On the other hand, it is important to note that in those locations where the number of new homes started exceeds household creation (imbalance <0), no significant imbalance related to «oversupply» has been detected: the differences are not very big in general and tend to be observed in relatively small municipalities (with a small number of new builds started in absolute terms). It should also be noted that the metric used does not take into account other determinants of demand, such as demand for second homes (domestic and foreign), temporary demand (from travelling workers, students or tourists) or demand in order to replace obsolete housing (housing depreciation).

If we zoom in on Catalonia and Madrid, we can see that this shortage of supply is not only limited to the capital cities of these regions but is also affecting many other surrounding towns. This phenomenon is especially evident in the metropolitan area of Barcelona, where some towns such as Santa Coloma de Gramenet (0.72) and Sant Just Desvern (0.79) present an «imbalance» that is much higher than Barcelona city itself (0.46). This shortage can also be observed in the most highly populated towns of the third and fourth ring around Barcelona (Terrassa, Sabadell, Rubí, etc.), on the Maresme coast north of the city (Mataró, Premià de Mar and Calella) and in some towns in central Catalonia, in this case not so much because of demographics but rather due to the very limited supply of new housing (Berga, Vic, Manlleu, Igualada, etc.).

Similar conclusions can be drawn for the cities of Barcelona and Madrid: in most districts there is a notable shortage of housing in relation to the new households being formed. The only exception are those districts in which most of the cities’ urban development is already currently taking place, such as the district of Sant Martí in Barcelona and those of Vicálvaro, Arganzuela and Barajas in Madrid.

Delving a little deeper into the geographic differences, the chart below shows municipal data aggregated by province.¹⁸ It reveals a positive relationship between the average imbalance of a province and its net household creation. The Community of Madrid, with 31,350 new households between 2020 and 2022, stands out as the region with the greatest demographic dynamism. 76% of the 128 municipalities in this region for which information is available suffer from a shortage of supply (imbalance >0), 81% of the region’s population lives in these municipalities and the average «imbalance» is 0.26. The figures are similar for the province of Barcelona: 72% of the 192 municipalities with information suffer from a shortage of supply, 85% of the province’s population lives in these municipalities and the average «imbalance» is 0.35. The data for the more tourism-oriented provinces reveal even greater stress (see the chart below).

Finally, it is worth examining whether such shortages in supply are generating additional pressure on the growth in house prices in these municipalities. To answer this question, we have estimated a linear regression of cumulative growth in house prices between Q4 2019 and Q3 2022 related to the «imbalance» metric, adjusting for the Q4 2019 price level.¹⁹ The estimated coefficient is positive and significant, suggesting that municipalities with a greater imbalance have experienced higher growth in their house prices.²⁰

n this article we have shown that, in the most demographically dynamic locations, the construction of new housing is not enough to meet the booming demand. This problem of supply shortages could get worse over the coming years as the population is expected to keep on rising as a result of immigration.²¹ Specifically, according to the latest population projections by the National Statistics Institute, around 217,000 new households could be created per year over the next five years. Furthermore, demographic trends will continue to be very uneven in geographic terms, as household creation is expected to be higher precisely in those provinces that already have an insufficient supply of housing (see the last column in the table above).

This lack of housing supply in the most dynamic economic areas is not a phenomenon unique to Spain but can also be observed in other European countries and the US.²² As people move in search of better employment, education and economic opportunities, the demand for housing in the most economically productive regions far exceeds the production of new housing.

In Spain, the residential development and construction sector points to several factors that limit the growth in supply in these more congested areas, including the scarce availability of land, an aspect closely related to different urban planning regulations which, in many cases, make it difficult to find new land for housing. In addition to these key factors limiting the development of new builds are also certain administrative aspects, such as slowness in processing permits and legal uncertainty, together with other factors such as insufficient labour, higher construction costs and shortages of some inputs. Moreover, in the current economic context it is very likely that many companies in the sector will be forced to postpone the launch of new projects due to the worsening macroeconomic situation and the impact of rising interest rates on demand.