Housing market is not expected to recover until mid 2011
Last week the governor of the bank of Spain predicted that prolonged crisis in the housing market in Spain was having severe repercussions on the rest of the economy. Although he did not refer to the ‘property bubble’, he did acknowledge that the sharp rise in prices and the number of new houses for sale coupled with cheap and easy lending conditions had led to an artificial situation in the Spanish economy. However when the international financial crisis began and credit became more difficult to get the ‘bubble’ burst leading to a significant fall in GDP.
According to the Bank of Spain the economy has not completely recovered and investment in housing will continue to fall until the middle of next year and despite incentives and investment in housing the market will have fallen below minimum levels seen in 1994. The study carried out by the bank of Spain forecasts that investment in housing has fallen to 4% of Spain’s GDP compared to its highest level of 7.
5% in 2007.
The study also underlines how the recent boom in the housing market when house prices appeared to have no limits revolutionized economic growth in Spain which is why when the property market crashed the impact on the economy was immediate. The demand for construction workers meant that unemployment fell below 8% in 2007 but now the lack of work in this sector means that unemployment has risen to above 20% (it is estimated that 1,000,000 construction jobs have been lost). Furthermore, the level of debt owed by Spanish households has also gone up by 125% since a decade ago.
Despite initial signs of recovery in the housing market and although house sales have gone up by 18% compared to a year ago there is still an enormous surplus stock of unsold new houses which will soak up demand for the next few years making a growth in construction unlikely.
According to calculations made by the Bank of Spain at the end of 2009 there were still between 750,000 and 1.2 million unsold new houses on the market. A few weeks ago the association of constructors estimated that there were around 700,000 unsold new houses and forecast that it would take at least three years to absorb this excess stock and reactivate the construction sector.