The challenge of increasing the supply of affordable housing in Spain
The problem of housing affordability, both rental and ownership, has worsened in recent years and is particularly affecting certain groups such as young people. Solving this issue is no easy task and requires action to be taken on multiple fronts and over an extended time horizon. Public-private collaboration is essential for boosting the supply of affordable housing, and industrialised construction shows promise as a new way to help overcome the major challenges that the sector is facing, such as attracting skilled and female labour, while promoting more digital and sustainable construction methods.
September 9th, 2024
Housing affordability problems: an issue that particularly affects young people
Concern about housing affordability has surged into second place in the list of concerns among Spaniards, according to the CIS barometer published in June 2024, climbing four positions relative to the one published in May. This reflects the increasing difficulties people are experiencing in being able to afford housing, whether under ownership or rental, particularly in the case of certain groups and across an increasing range of geographical areas.7
Young people are one of the groups that face the greatest obstacles in being able to afford housing, and this manifests itself in the ever-increasing age at which people move out from their parents’ home, or «flee the nest». In 2022, 65.9% of young people between 18 and 34 years of age had not yet done so, compared to 53% in 2008 (an increase of around 13 pps). Although several socio-demographic factors can influence the delay in the decision to flee the nest (changes in preferences, the delay of key decisions, etc.), it is clear that economic factors also play a role. These include, among others, young people’s situation in the labour market (high unemployment and temporary employment, and a relatively low average wage), as well as developments in the real estate market, where home prices have outpaced young people’s wages.
- 7. For a detailed analysis of how housing affordability problems are affecting different groups and geographical areas, see «The Spanish housing market: recent changes, risks and affordability problems», Annual Report 2023, Chapter 4, Bank of Spain.
The delay in the age at which young people flee the nest in Spain suggests a growing housing affordability issue for this group of the population
Among young people living independently of their parents, there is a marked decline in the proportion who are homeowners, having fallen from 66% in 2002 to 31.8% in 2022.8 Furthermore, among those who have managed to get on the property ladder, the median value of their main home has fallen significantly in the last 8 years and to a greater extent than in the case of other age groups. This suggests that young people today generally buy properties that are smaller and located in lower-priced areas than was the case a few years ago, and this has significant implications for the financial situation of these new generations: the lower rate of home-ownership coupled with this lower-value housing is widening the generational gap in terms of wealth accumulation throughout the life cycle.9
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In any event, it should be noted that households with a mortgage, including young people, do not generally appear to be overburdened in meeting their mortgage payments and other housing-related expenses.10 In particular, 4.4% of Spanish households who own a home with a mortgage are overburdened, which is slightly below the 5.6% for the EU as a whole.11 However, among young mortgaged households, the overburdened rate is slightly higher than that of all Spanish households, specifically 1.4 points higher.12
- 10. The overburdened rate is defined as the proportion of households that have to allocate more than 40% of their income to covering their housing-related expenses (mortgage or rent, plus utility bills).
- 11. Data from the Eurostat Living Conditions Survey (2023).
- 12. Internal calculations based on micro-data from the National Statistics Institute’s own Living Conditions Survey (2023).
Households who rent face greater financial challenges in meeting their housing payments
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In the rental market, things are different.13 This is due to the lower average income level among households who rent, as well as the sharp increase in rental prices in recent years, having risen by 16% between 2014 and 2022 across Spain as a whole according to the National Statistics Institute’s rental price indicator. In fact, the rise in rental prices has been so significant that the overburdened rate among households who rent at market rates has become very high in Spain, at 30.6%, which is well above the EU average of 20.3%. Among specifically young people who rent at market rates, the overburdened rate is very similar to the average for the population as a whole.14
- 13. For a detailed analysis of the evolution of rental prices and the burden they represent by province, see the article «Renting a home in Spain: on rising rental prices and the need to increase the supply of affordable rented accommodation», published in the Real Estate Sector Report of S2 2023.
- 14. Internal calculations based on micro-data from the National Statistics Institute’s Living Conditions Survey (2023).
30% of households who rent have to allocate more than 40% of their income to housing-related expenses. In contrast, households who own their home are generally not overburdened, including in the case of young people
Housing affordability problems can have adverse economic and social effects. In particular, the excess effort related to rental payments makes it difficult for these households to save, and this limits their ability to buy a home in the future. In turn, this situation can affect other vital decisions such as birth rates, workers’ geographical mobility and the accumulation of human capital. In order to reverse this situation, public policies must be adopted to improve the affordability of housing, in terms of both rental and ownership, especially for the groups hardest hit (young people, immigrants and households in the lowest income quintiles) and in geographical areas with the most acute problems (major cities and their areas of influence, and tourist areas). In this regard, the government has recently approved a line of ICO guarantees for an amount of 2.5 billion euros to support the granting of mortgages of up to 100% of the value of the home for young people and families with children who meet certain requirements.15 Such demand-side measures may help to make buying a home more attainable for a portion of the population that has sufficient payment capacity but insufficient savings. Supply-side policies are also needed; that is, policies that help to boost the supply of housing, especially affordable rental and social housing, in order to stimulate an existing stock that is insufficient to meet the needs of the population.
- 15. See the website on ICO guarantees available to support young people and households with dependent minors in purchasing a home.
An insufficient supply of affordable housing
The current stock of affordable rental housing in Spain is insufficient to cover the growing demand. The latest data are not particularly encouraging: in 2023, 8,646 subsidised homes were completed. This is a similar figure to the average over the last 10 years, but well below the 60,000 a year completed during the previous decade, as we will see in detail below. In terms of tenure, 52% of the subsidised homes completed in 2023 were allocated for ownership. In other words, just over half of them were put on sale. While this falls far short of the figure of 80% recorded in 2014, it is still high in view of the shift in housing policy towards a greater emphasis on rentals. That is precisely one of the main reasons why the stock of affordable housing in Spain is so limited: historically, there has been an emphasis on subsidised housing for ownership, and this has prevented the accumulation of a significant stock of housing for rent.
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The current stock of affordable rental housing is insufficient to cover the needs of the population. Public-private collaboration is essential in order to boost supply
Since 2010, the government budget allocated to housing has been very limited. In fact, it is the private sector that develops the majority of subsidised housing (76% in 2023). This highlights how public-private collaboration is essential in a context in which the government is unable to meet the challenge of substantially increasing the number of affordable homes by itself, due to both budgetary constraints and its finite capacity to manage and execute projects. Thus, private sector involvement is essential in order to substantially boost the supply of affordable housing and, therefore, the government must establish the necessary instruments and conditions to ensure the financial viability of such operations. For instance, it could make more land available to the market for the development of affordable rental housing through concessions or land rights, it could cut planning permission processing times, increase the budget allocations for public housing policies, facilitate the conversion of buildings for housing (e.g. offices in areas of low tertiary demand and high residential demand), or increase the amount of building that is permitted in areas with high demand and a shortage of land, etc.
Subsidised housing (final qualifications)
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In affordable housing developments intended for sale, one aspect that should be taken into account to ensure their viability is to update the maximum sale price (in the case of social housing, known as VPO). In Q1 2024, the national average price of subsidised housing is around 37% below that of unsubsidised housing (vs. −25% in 2017). This gap has widened significantly in recent years due to the growth in the price of unsubsidised housing (+25% between 2014 and Q1 2024), unlike the price of subsidised housing, which has stagnated (+6.1%). Updating the maximum sale price of subsidised housing in a context marked by a sharp rise in construction costs, as several autonomous community regions such as Madrid and Cantabria have recently done, would incentivise an increase in supply.
Updating the maximum sale price of subsidised housing in a context marked by a sharp rise in construction costs, as several autonomous community regions such as Madrid and Cantabria have done, would incentivise an increase in supply
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Industrialised construction shows promise as an important ally for affordable housing
One aspect that is gaining ever greater prominence among new developments in Spain is industrialised construction. This construction method, which is based on modules that are built in a factory before being assembled on site, was originally developed almost exclusively for building detached houses. Recently, however, industrialised construction is enjoying rapid growth and it is now being applied to blocks of flats. The most common industrialised elements include façades, cladding, etc. as well as complete units such as bathrooms or kitchens.
Industrialised construction makes it possible to attract skilled and female labour to the sector, while promoting more digital and sustainable construction systems
Industrialised construction offers many benefits, including shorter execution times, minimised cost deviations, the generation of less waste, lower water and energy consumption in the construction process, and quality standardisation. In addition, it has been presented as the main solution to the problem of a lack of labour in the sector, with factories incorporation new, higher-skilled professional profiles (engineers, ICT specialists, etc.), while also facilitating the incorporation of women into what is a highly male-dominated sector.
Industrialised construction also addresses the need to build in a more sustainable way, reducing the environmental impact and the consumption of energy, water and natural resources in the construction process. Moreover, the design and construction of buildings that can be dismantled prevents most of the materials that make up the building from becoming waste when they are eventually demolished; on the contrary, they can be transformed into banks of materials for future construction.
Thus, industrialised construction may be the solution that allows the sector to maintain and increase the production levels that are required to meet the current housing demand, attract young people, incorporate women into the sector, improve the working conditions of the various trades involved in the construction process and improve the sustainability of construction.
The labour force in the construction sector is highly male-dominated and ageing, although it shares the same demographic pattern with the rest of the sectors
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In conclusion, solving the issue of housing affordability is no easy task and requires action to be taken on multiple fronts and over an extended time horizon. Public-private collaboration and innovation in construction methods will be key in overcoming the limitations which the sector suffers in order to substantially increase the supply of affordable housing in the coming years.