The Bank of Spain rules out that there are signs that Spain is heading towards a property bubble because prices are still, in real terms, around 20% below their peak in 2007, before the crisis struck, and households and companies are in a much more solid debt position than then.
Director General of Financial Stability, Regulation and Resolution, Daniel Pérez Cid, emphasized that “today” they do not appreciate the risks of a bubble in the housing market, at least in terms that could lead to a shock affecting the stability of the banking system.
The head of the authority stressed during the presentation of the fall financial stability report: “Today we do not see these indicators of a bubble. What is different is that we do not monitor, follow up, or make efforts. But we are not in the situation that was before the previous crisis.”
Thus, in the years leading up to the Great Recession, several factors, such as “extremely runaway growth in demand,” coincided with high debt and weak conditions for both households and the construction sector.
But now, housing demand is closely tied to population growth and the push for tourism, which collides with housing supply that does not respond flexibly. The financial sector has not relaxed its standards for granting real estate loans and credit, which partly avoids the bulk of these systemic risks.
In fact, according to an index prepared by the financial institution, the current level in terms of risk is similar to the level of 2001, several years before it began to worsen (2004-2005) and led to the bursting of the bubble. Currently, this market risk is mainly explained by the prices and activity itself in the real estate sector.
Prices in real terms, discounting inflation, are currently at 2005 levels, about 17.5% below their peak in 2007. Overall, growth in housing costs has been growing at a much faster rate than median household income for about a year, putting further pressure on household pockets.
But they see a sign of concern in housing prices in areas experiencing the most stress, rising at faster rates than those in counties with less demand. That is, the price per square meter is already approaching 3,500 euros in those areas where land was already more expensive, while remaining stable in the rest.
The supervisor says in the aforementioned report: “Contrary to what was observed during the real estate boom in the first decade of the twenty-first century, no general expansion in prices was observed by governorate.”
Therefore, the Bank of Spain concludes that the market is significantly less vulnerable than before the financial crisis, and that price development “falls into a situation where, from a historical perspective, construction activity is weak, household debt is low, mortgage credit is contained, and credit granting standards do not show signs of significant relaxation.”
About The Author
