A more sustainable, longer-lasting expansion
The strong growth in the supply of housing persists, especially in areas with the highest demand. The sector will continue to expand over the next few quarters.
Spain's real estate sector ended 2018 with very good figures: house sales totalled 516,000, up 10% on 2017; new building permits broke through the 100,000 threshold, 25% more than the previous year, while growth in house prices speeded up to 6.7%. This upward trend in the real estate sector contrasted with economic conditions that are starting to show signs of peaking: Spain's GDP grew by 2.6% in 2018, still a high figure but below 3% for the first time in 3 years. This deceleration in the Spanish economy's growth rate is due to the weakening of some temporary factors that had boosted growth in previous years, such as lower interest rates, an expansionary fiscal stance and falling oil prices. In 2019 and 2020 we expect the economy to continue expanding but at a slightly slower rate: according to CaixaBank Research, Spain's GDP will grow by 2.3% and 1.9%, respectively.
Given this gradual slowdown in the Spanish economy, we believe that growth in the real estate sector will also moderate. This should not be interpreted as a sign of weakness for the sector, however, but rather a return to more normal and sustainable growth figures after the sharp rise observed during the recovery. In other words, we expect the real estate sector to move down a gear but still perform well, as we will explain in the rest of the Report.
House sales slow down their rate of growth. For 2019 we predict growth of around 5%
Looking first at the demand indicators, we can see that, since the end of 2018, growth in sales has gradually lessened. While sales rose by 11.2% between January and September last year, in 2018 Q4 their increase was lower (7.5%). This moderation continued in Q1 2019 with a more contained rise (3.7%). These data are in line with the information provided by Google Trends on the evolution of searches for housing on the internet, with the number of searches continuing to fall in April and May.
The number of house purchases by foreigners is slowing down somewhat more sharply (–3% year-on-year in Q1 2019) although we should remember that this growth has been very strong over the past few years and purchases are therefore stabilising at a very high level. In fact, the share of house sales to foreigners out of all sales has hardly fallen: 12.2% in Q1 2019 compared with 12.6% in 2018 (for a detailed analysis of house sales to foreigners, see the article «The rise in house purchases by foreigners in Spain: together forever?» in this Sector Report).
Sales of new housing are gaining ground but still represent a very small share compared with secondhand housing
Although total sales are slowing down, there is a notable difference between the sales of new and second-hand housing. In fact, as the property developments started in the past few years enter the market, sales of new housing are increasing their share: in 2018, new housing sales grew more than second-hand sales for the first time in over 10 years. This good performance by new housing sales continued in Q1 2019 with 14.4% growth compared with 1.4% for second-hand housing. Consequently, the relative weight of new housing is gaining ground (18.4% in Q1 2019) although still very close to the minimum level and very far from the average for the past decade (36%)1 .
- 1. House sales according to the National Statistics Institute. According to the Ministry of Public Works, new house sales accounted for 9.7% of the total in 2018.
New housing sales are starting to pick up
Number of sales
The factors supporting housing demand (essentially job creation, wage rises, low interest rates, mortgage activity and foreign demand) are helping the trend in the real estate market to remain positive. However, some of these factors such as job creation and foreign demand are expected to slow down slightly, while there is no increase in the rest of the factors. Specifically, CaixaBank Research expects the number of employees to increase substantially (by 400,000 in 2019 and 385,000 in 2020) but still below the average of 500,000 employees per year posted between 2015 and 2018. Nevertheless, wage increases, which are slightly above 2%, will boost growth in gross disposable household income over the coming quarters.
The accommodative financial conditions will also continue over the next few years as the ECB will normalise its monetary policy at a much slower rate than the one predicted a few months ago. According to CaixaBank Research forecasts, the 12-month Euribor rate will still be around 0.50% at the end of 2020.
The low interest rate environment and favourable economic climate will continue to support the flow of household credit. The volume of new credit to purchase housing rose by 8.7% in Q1 2019 (compared with 13.2% growth in 2018) while the number of mortgages increased by 11.2% year-on-year in February 2019 (cumulative over 12 months). It is worth noting that over 40% of these mortgages are fixed rate due to the protection afforded by this kind of contract against interest rates rising. Spain's new Mortgage Act, which came into force on 16 June, promotes fixed rate mortgages as well as the conversion of existing variable mortgages to fixed rate, so we can expect the proportion of this kind of mortgage to continue growing (see the article «The key aspects of the new Mortgage Act» in this Sector Report).
The construction industry looks very dynamic
Supply indicators point to Spain's construction industry growing more quickly than the economy as a whole and its share is therefore increasing, although this is still far from the figure achieved in the property boom of 2000-2007. Specifically, the gross value added for construction accounted for 5.9% of GDP in 2018 compared with 5.1% in 2014 (minimum) and 10.4% in 2006 (maximum). The figures are similar in employment terms: employment in construction accounted for 6.3% of the total in 2018, compared with 5.7% in 2014 (minimum) and 13.3% in 2007 (maximum).
Supply indicators for the real estate sector
In 2018, 100,733 new building permits were granted, 24.7% more than in 2017, a positive trend that consolidated further in the first few months of 2019 (+25.5% year-on-year cumulative over 12 months up to February). In spite of this strong growth, it should be noted that the current level of production for new housing is still below the net creation of homes projected by the National Statistics Institute (around 135,000 homes every year on average during the period 2019-2025). A close correlation can also be seen between demand and supply; i.e. more construction is taking place in zones where there is more demand. Another way to check whether the supply of new housing is excessive is by comparing this to the population. The following chart shows that the number of new building permits per 1,000 inhabitants in 2018 was 2.2, much lower than the historical average of 7.8.
New building permits per 1,000 inhabitants
Given the real estate sector's current status, with strong growth in the supply of new housing and demand slowing down slightly, we can expect prices to moderate their growth over the coming quarters. Nevertheless, the rise in Q1 2019 was a notable 6.8% year-on-year according to the National Statistics Institute (based on transaction prices). This significant growth will continue over the next few months, around 5% on average during the period 2019-2020 according to CaixaBank Research.
House prices will continue to rise but at a slower pace
The expected moderation in the growth rate for house prices, together with the rise in disposable household income, will help to contain the increase in the affordability ratio and mortgage burden observed during the real estate sector's recovery. In fact, according to the Bank of Spain, in 2018 households needed 7.4 years of their entire income to buy a home, one year more than in 2013. The mortgage burden2 also increased to 32.3% in 2018 compared with 30.5% in 2015. CaixaBank Research forecasts point to a possible slight increase in the mortgage burden up to 33% by the end of 2020 due to house prices rising faster than gross disposable household income and a slight increase in interest rates.
- 2. Percentage of the gross disposable income required by an average household to meet its mortgage payments over the first year.
Mortgage burden: predicted trend between 2018 and 2020
In short, Spain's real estate sector is entering a more mature phase of the cycle when the growth rates observed in the past will tend to moderate. This slowdown should be seen as positive, however, as it will help the sector's expansion to become more sustainable and longer lasting.