A controlled slowdown
The sector has seen a slowdown in 2019 as the economic outlook has deteriorated. In 2020 the trend will still be positive although the rate of growth will ease.
The real estate sector is slowing down more markedly than had been predicted just a few months ago. This has led us to revise downwards our forecasts for growth in house prices and sales compared with the projections published in the Real Estate Sector Report last July. However, it should be noted that this slowdown has occurred while the growth outlook for the Spanish economy has also declined. Specifically, the CaixaBank Research GDP growth forecast has been adjusted from 2.4% to 1.9% in 2019 and from 1.9% to 1.5% in 2020 due to the impact of declining global growth, especially in some European countries, and also the revision of the historical figures carried out by the National Statistics Institute.
Despite the slowdown observed in the real estate sector, its trend will still be positive in 2020
Should we be concerned about this change in outlook? Although there is good reason to be on the alert, as yet there does not seem to be any cause for alarm. The factors that lie behind the slowdown are largely external while those underpinning growth in the real estate sector (essentially a sustained increase in employment, the recovery in wages and accommodative financial conditions) are still solid, even though they have weakened slightly, as we will see in more detail below. It should also be remembered that this slowdown in the growth rate of house prices, with increases more in line with household disposable income, will ensure the current cycle is more sustainable and lasts longer. For these reasons, we have maintained our scenario of moderate growth for the real estate sector in 2020.
As we noted in the previous section, employment is still posting considerable growth rates (our forecast is 330,000 more employed in 2019 and 265,000 in 2020), although this rate is significantly lower that the average posted between 2015 and 2018 (500,000 workers per year). Moreover, although fewer jobs are being created, household disposable income is still increasing at a similar rate to previous years thanks to the recovery in wages, up by just over 2%. On the other hand, the real estate sector is also being supported by favourable financial conditions. Although there was speculation before the summer that the ECB might start to raise interest rates in 2020, the deterioration in the global scenario has led to an about-turn in monetary policy. In fact, the ECB has implemented another monetary stimuli programme, further cutting the depo rate to -0.50% and restarting net asset purchases at a rate of 20 billion euros per month. All the evidence now suggests that interest rates will remain very low for quite some time.
After strong growth in the past few years, demand for housing is starting to stabilise. According to the National Statistics Institute (based on the Spanish College of Registrars), house sales fell by 3.2% year-on-year between January and September 2019, although this was partly due to the temporary impact of the new mortgage act which came into force last June (house sales fell by 9.6% year-onyear between July and September). According to data from the National Accounts system, in real terms residential investment fell by 0.9% quarter-on-quarter in Q3 2019 (+1.8% year-on-year), for the first time breaking the upward trend that began in 2014. In any case, sales total more than 500,000 units per year, which translates into over 10 transactions per 1,000 inhabitants, so it is not surprising that growth should start to taper off.
Statistics published by the Ministry of Public Works (based on data from the General Council of Notaries) provide a breakdown by type of buyer. In the first half of 2019, house sales fell by 2.8% due to the decline in Spanish buyers, especially sales of second homes (-7.5% year-on-year in the first semester)1. Sales to foreigners also slowed down but still grew (+1.2% year-on-year in the first semester).
- 1. Sales of second homes are defined as those in which the buyer lives in a different province to the property's location.
In line with the dip in sales, there was also a slight decrease in new credit granted to households to buy housing (-0.6% year-on-year in the cumulative figure from January to September 2019). This decline can partly be explained by decreases above 20% in June and July because of the delay in some transactions owing to the regulatory changes, since credit flows picked up again in August and September (by 5.3% and 4.6% year-on-year, respectively).
House purchases by type of buyer in Spain
Number of purchases
After the strong growth of recent years, house sales are stabilising at the levels reached in the past
Growth in the construction sector may have weakened throughout 2019 but it is still outperforming the Spanish economy as a whole. The gross value added for construction, in real terms, increased by 2.4% year-on-year in Q3 2019, compared with 6.2% growth one year earlier. However, it is still growing more than GDP as a whole (2.0%). New building permits also saw notable growth of 8.8% year-on-year between January and September 2019 in spite of this being a significant slowdown compared with the rise of 24.7% posted in 2018. It is also important to note that no supply-related excesses have been observed: the current production level for new housing (around 107,000 homes per year) is still below the net creation of households in the past 12 months (120,000 according to the LFS) and also below the INE's projection for the coming years (around 135,000 households each year on average in 2019-2025).
The construction sector was responsible for 1 out of every 12 jobs created in the Spanish economy between Q4 2018 and Q3 2019
The number of people employed in construction increased by 2.4% year-on-year in Q3 2019 (29,700 more workers than the previous year), a significant slowdown when compared with the 7.4% growth posted over the same period in 2018 (86,000 workers). Nevertheless, employment in construction has grown more strongly than in the rest of the sectors (total employment rose by 1.8% year-on-year in Q3 2019).
The construction industry is slowing down but still growing significantly more than the Spanish economy overall
Annual change (%)
In keeping with more subdued demand, house prices have also eased in 2019. According to the statistics published by the Ministry of Public Works (based on appraisal prices), house prices grew by 3.2% year-on-year in Q2 and Q3 2019, slightly below the 4.4% posted in the first quarter of the year. House prices according to the National Statistics Institute (based on transaction prices) also eased, going from 6.8% growth year-on-year in Q1 2019 to 5.3% in Q2. However, there are still considerable regional differences, as analysed in detail in the article «The widening gap between Spain's house prices» in this Sector Report. Over the next few quarters, we expect prices to continue their slowdown, with growth in the region of 3% in 2020. As mentioned at the beginning of this article, it is important to note that this slowdown in growth for house prices, with increases more in line with household disposable income, should help the current expansionary cycle in the real estate sector to continue.
Year-on-year change
(%)
The moderation in the growth rate of house prices, the increase in household disposable income and favourable financial conditions will help to keep affordability ratios and the mortgage burden at a similar level to the present. According to the Bank of Spain, these ratios fell slightly in the second quarter, breaking the upward trend that began in 2015. Specifically, the affordability ratio (years of income required to buy a home) was 7.49 in Q2 2019 (compared with 7.51 in Q1 2019) and the mortgage burden (percentage of gross disposable income which a median household allocates to meet the mortgage payments required to buy a home in the first year) was 33.3% in Q2 2019 (compared with 33.5% in Q1 2019).
