When there are multiple active fronts, it is difficult to identify which flank is potentially the most vulnerable in order to protect it in time. This is the feeling one may have in the current context. To date, economic activity in the major developed countries has been holding up better than expected. This is apparent in the recovery in business confidence and, above all, the good job creation figures, and it has led to a slight improvement in the growth outlook according to the analyst consensus.
However, the risks surrounding the global economy are numerous and they are not fading. In recent weeks, all eyes have been on the financial flank in order to adequately assess the impact that the turbulence generated by Silicon Valley Bank and Credit Suisse could have. In contrast, in the preceding months efforts were focused on estimating the consequences of the energy crisis, the extent of the inflationary pressures and the capacity of the central banks to tackle them – challenges which are still very much present today.
All these fronts are difficult to calibrate, but important. We cannot lose sight of them. Another area which has garnered little attention to date, but which we must keep on our radar, is the real estate sector. As the financial crisis of more than a decade ago demonstrated, what happens in this sector can end up affecting the economy as a whole. In recent quarters, after years of strong growth, in several developed countries it has begun to experience a correction.
One of the best thermometers for tracking the situation in the sector is provided by the OECD, which has a database covering 45 countries. Of these, more than two-thirds are already showing a negative rate of growth in the real price of housing. There is another fact that draws attention: according to the indicators produced by the Dallas Fed, there are five countries in which the price of housing is well above equilibrium levels and, therefore, the correction in housing prices could be significant.
All this is analysed in detail in several articles of this Monthly Report. Some of the countries where the correction could be substantial include the US, Sweden, Germany and the United Kingdom, with estimates placing the potential price declines at between 15% and 20% in cumulative terms over the coming years. Equally of note is the fact that the Spanish economy is not on the list of countries with the greatest imbalances. In fact, at the aggregate level it is estimated that a material correction in housing prices would not be necessary.
Beyond housing prices, there are several indicators which show that, after years of rebalancing, the Spanish real estate sector has a reasonably clean bill of health. On the one hand, the sector’s relative weight in the economy today is a far cry from the oversized role it had amassed 15 years ago. Residential investment accounts for 5.5% of GDP, less than half the level of 2007. Equally important is the fact that the sector’s activity is underpinned by far lower levels of debt than a decade ago. Specifically, household debt stands at 54% of GDP, below the euro area average and well short of the 82% reached in 2008. Moreover, it should be noted that the bulk of the mortgages granted in recent years are at fixed rates, which limits the impact of the ECB’s current interest rate rises. Finally, it is important to note that the banking sector’s exposure to property developers and the construction sector in terms of loans is now much more contained, as they account for 7% of total credit, less than a third of the level of 2007.
In countries where the real estate sector does have aggregate imbalances, we can expect to see a significant correction over the coming years, albeit a gradual one
a priori. The good position of the labour market, as well as the largely healthy state of household finances, limits affordability problems and should prevent the activation of feedback mechanisms which could otherwise trigger a downward spiral in prices. However, in order for this scenario to come to fruition, it is of the utmost importance that the inflationary pressures moderate over the coming months, allowing the central banks to stop raising interest rates. Although in Spain the real estate sector is in a position of relative strength, a hard landing in the sector in the major developed countries could lead to a tightening of international financial conditions and a weakening of the global economy, which in turn would limit the Spanish economy’s capacity to recover.