Since the early 1970s, the Spanish property market has experienced three booms. The first began in the early seventies and ended in 1973 with the first oil crisis. The second took place between the mid-80s and the early nineties. The latest, and most intense of these booms, began in 1997 and ended in 2008, coinciding with the start of the international financial crisis. Exhibit 1, which shows the annual progress of the number of homes begun and completed in Spain between 1995 and 2011, illustrates the scale of the boom.
As the exhibit shows, between 1997 and 2008, the annual average number of new housing starts exceeded 550,000 homes –peaking in 2006 at a figure of close to 760,000– with completed homes following the same trend with a time lag of just over a year. As a further indication of the intensity of this boom, Spain accounted for approximately 40% of all new homes built in the European Union
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SEFO - Spanish Economic and Financial OutlookVol. 2, N.º 2 (March 2013)
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000
Started Completed
5 Arrazola, M. J. de Hevia, D. Romero and J. F. Sanz (2013); “Determinants of the Spanish housing market over three decades and three booms. Long-run supply and demand elasticities”, (mimeo).
Exhibit 1
Trends in housing starts and completions
Note: Aggregate annual values based on monthly data.
Source: Ministry of Development.
(EU) during this period, and the boom resulted in an increase in Spain’s housing stock of no less than 50%.
Surprising as it may seem, this boom in home building was accompanied by sharply rising prices. Exhibit 2 illustrates how between 1997 and 2008 the average price per square meter of homes in the free market almost tripled, rising from 711 euros to 2,070 euros.
The rapid growth both in home building and property prices in the Spanish market between 1997 and 2008 was driven by strong simultaneous
pressure from various factors. One of the factors increasing the pressure on the demand side of the housing market was population growth, driven primarily by immigration. Spain’s population grew by around six million between 1997 and 2008.
Other factors stimulating demand in this period included Spanish households’ rising incomes, for example in terms of gross national per capita income (at purchasing power parity in current dollars), incomes doubled between 1997 and 2008;
along with the improved labour market and consequent drop in the unemployment rate, which fell from 22% in 1996 to around 8% in 2007. Nor can one overlook the unprecedented drop in the cost of home loans, initially due to the efforts to meet the Maastricht convergence criteria, and later, thanks to Spain’s membership in the euro.
In 1996, the nominal interest rate on mortgage loans granted for home purchases was around 9%. This dropped to 6% in 1997 and was less than 5% between 1998 and 2007. In real terms, interest rates stood at over 5% in 1996, but were rarely above 1% between 1999 and 2006. Other factors also exerted exceptional pressures on Spain’s housing market, such as the atypical
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800 1,000 1,200 1,400 1,600 1,800 2,000 2,200
As a further indication of the intensity of the property boom, Spain accounted for approximately 40% of all new homes built in the European Union (EU) during this period (1997-2008) and the boom resulted in an increase in Spain's housing stock of no less than 50%.
Exhibit 2
Trend in price per square meter of free-market housing
Note: Aggregate annual values based on quarterly data.
Source: Ministry of Development.
preference Spaniards have for home ownership6, the existence of tax incentives to encourage home buying, and, of course, the continuous rise in home prices in real terms, which made buying a home a very profitable investment. The combination of these factors, in conjunction with the ease with which Spanish businesses and households were able to borrow as of the late 1990s –a situation not seen before in Spain–
all helped fuel the Spanish property boom. This resulted in a property bubble that ultimately burst with devastating consequences for the Spanish economy and financial system.
Exhibits 1 and 2 illustrate the scale of the collapse of the property boom. For example, in terms of housing starts, in 2011 there had been a drop of 90% from the peak in 2006. And in the case of free market housing prices (i.e. excluding subsidised social housing), which peaked in 2008, by 2012 there had been a drop of around 26%, equivalent to a decrease of 32% in real terms. In 2012, the price per square meter in the free market
had returned to 2004/2005 levels in nominal terms, and to 2002/2003 levels in real terms.
Nevertheless, the significant drop in housing prices has been insufficient to stimulate the property market. Indeed, Exhibit 3, which shows the number of property transactions in the free market, reveals how the total volume of transactions in
2011/2012 was just a third of that in 2006/2007.
Similarly, Exhibit 4, showing the trend in the unsold housing stock, illustrates how this rose
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SEFO - Spanish Economic and Financial OutlookVol. 2, N.º 2 (March 2013)
6 The facts available indicate that 83.2% of Spanish households own at least one home, a figure slightly higher than that in Ireland (81.2%) and much higher than in other countries with a higher per capita income, such as the United Kingdom (70.7%), the United States (68.7%), Germany (41.0%) or Switzerland (38.4%).
The significant drop in housing prices has been insufficient to stimulate the property market and the non-price factors exerting pressure on the housing market (population, income, unemployment or ease of borrowing) ceased to do so in the wake of the 2008 crisis.
854,689 907,987
768,864
509,880
414,133 444,388
309,138 306,060 377,156 364,506
291,478
201,726
165,215
98,094 0
200,000 400,000 600,000 800,000 1,000,000
2005 2006 2007 2008 2009 2010 2011
Stock of free-market homes Total new builds
Exhibit 3
Sales of free-market homes
Source: Ministry of Development.
sharply after 2007 to reach a plateau at around 700,000 homes in 2009. This is explained by the fact that the non-price factors exerting pressure on the housing market (population, income, unemployment or ease of borrowing) ceased to do so in the wake of the 2008 crisis. Population growth slowed markedly after 2008. In the run- up to the crisis, the population was growing at a rate of 1.6% a year. In 2011 growth had slowed to just 0.1%, and the figures for 2012 suggest the population shrank by approximately 0.1%.
Incomes have also performed poorly in Spain in recent years. For example, gross national per capita income (at purchasing power parity in current dollars) fell by 2.7% between 2008 and 2011. This fall has, of course, been influenced by the catastrophic trend in unemployment, which soared to 26% in 2012. Likewise, the international financial crisis and the Spanish banking crisis have totally reversed the considerable ease with which businesses and households were able to borrow prior to 2008. Thus, it would seem that most the factors that worked together to fuel the property boom between 1997 and 2008 are now conspiring to make the crisis in the property market drag on for several more years.