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Wednesday, July 6, 2022

A housing market without a bubble, but under observation

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The Spanish real estate market is unleashed. The data for the last few months has shown such intense activity that on many occasions to look for precedent one inevitably has to go back to the bubble years. But experts in the industry, both from academia and from private companies, shy away from this comparison. They argue that the current situation differs from before the Great Recession and believe the coming months will be crucial to see how the brick reacts to the deteriorating economic situation.

The alarms have been on for a long time. “House prices are showing signs of overvaluation,” the Bank of Spain pointed out in its report Financial Stability Report of spring, published in April. The analysis sees “no signs of pronounced imbalances” but requires “close monitoring of this market in which the armed conflict is taking place [de Ucrania] could have opposite effects. Agency sources now insist in an emailed reply that “significant macrofinancial downside risks remain, stemming from high inflationary pressures and geopolitical tensions that could affect household solvency”. In other words, as the cost of living rises and financing conditions tighten, many families may find it difficult to repay the loan or move homes.

But this possibility is not even guessed in the official data. The latest figures from the National Institute of Statistics show a lively sales market. Between May 2021 and April 2022 (the latest available month), more than 600,000 homes changed hands in Spain, a similar volume to the summer of 2008, on the eve of the collapse of Lehman Brothers. And it’s not as if the apartments are being given away: the price increase in the first quarter, at 8.5% compared to the same period in 2021, is the strongest in almost 15 years.

For Ignacio de la Torre, chief economist at the investment firm Arcano Partners, the acceleration in prices is due to “the fact that they have risen less than in other western countries and sooner or later have had to be adjusted”. De la Torre doesn’t see that as a problem unless the pace of house price increases is far removed from the growth in household income that the expense ratio would trigger. This concept, which relates the cost of houses to what families can afford, seems to him the most useful for defining a bubble: “Over 35% a market is considered stressed. In the US it’s 42% because prices there have risen by 21%; but in Spain we start at 31% [de ratio de esfuerzo]which is a reasonable percentage,” argues the economist.

He knows all sides of the coin in detail.

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Spain is not badly portrayed in the Federal Reserve’s “debauchery” (bubble is an outlaw) indicator, which is compiled by the Bank of Dallas and is one of the few international indices that attempt to measure the formation of bubbles . House prices are far from “explosive behavior” levels, a position that clearly includes the US, the two largest economies in the EU (Germany and France) and several countries in northern Europe. According to the latest Eurostat data, housing prices rose by an average of 10% in the European Union and 9.4% in the euro zone at the end of last year. The Netherlands had the dubious honor of being the locomotive with homes soaring nearly 19% and Spain was fifth.

José García Montalvo, professor of economics at Pompeu Fabra, alludes precisely to the Netherlands to contrast his situation with that of the Spanish market and make another argument antibubble. “There are countries where lending standards seem to be relaxing, and things seem to be happening in the Netherlands. It doesn’t fit with rigorous lending, while in Spain this rigor has been maintained, ”says the professor. At the Bank of Spain, they agree that “mortgage conditions in general remain cautious”, although they recall that “new mortgage lending is at an all-time high since 2010”.

To find a history of the 437,550 home mortgages that originated from April last year to March this year (the latest INE data) one has to go back more than a decade: to the fall of 2011. And that’s more than 6,300 million mortgage loans that in the third month of 2022 are unique since August 2010. But even experts currently see no clear signs of a bubble on the mortgage market. Samuel Población, director of the CBRE consultancy’s residential area, confirms that “there is no overfunding and people buy because they have the ability to pay the part that the banks do not fund” (usually 20% plus taxes). It also highlights the low level of construction (affected by the cost of materials) and developer loans, the real nightmare of the sector in 2008.

Population explains the boom in the market, which is very focused on second-hand homes, because “buyers expected interest rates to rise from the summer and preferred to close the deal earlier”. At a time when the European Central Bank has already said in no uncertain terms that the price of money is imminent, 12-month Euribor, the indicator to which most mortgage loans in Spain refer, has led an abrupt escalation. It switched from negative to positive in April and this week it surpassed 1%, something that just a few weeks ago no analyst was even considering for year-end.

Paradoxically, what will be bad news for many families who have already bought or are looking to buy a home is not so bad for the real estate market as a whole. “To contain a bubble, you need a dam,” says Gonzalo Bernardos, director of the master’s program in real estate consulting, management and promotion at the University of Barcelona. The economist believes Spain is not in a bubble situation but risks suffering as real estate has been “all cheap” in recent months. The situation could change, he argues, if “a large segment of the population doesn’t have the numbers” to buy. For example, when credit becomes more expensive.

Several of the experts consulted are also concerned about the evolution of employment data, a variable closely related to the housing sector. When things end up going wrong, Spanish property faces a challenge as to its future, but it also tests whether the overall growth of recent years has been healthy. After all, the bubbles, which are somewhat capricious and difficult to anticipate in their formation, are never perceived as clearly as when the soap jumps through the air.

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Source elpais.com

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