What Spain can teach us about the UK housing market

There’s one factor more than any other that UK house price bulls use to back up their views. Supply and demand.

There are plenty of variations on the theme. But the general argument goes like this: “We live on a small island, our population is growing, and there just aren’t enough houses to go around.”

And the rebound seen in the market last year simply seems to confirm this view. There aren’t enough houses – so you can’t go wrong with bricks and mortar.

The bulls have got it right in one sense. House prices are indeed all about supply and demand. But it’s supply and demand for credit, not houses.

If you want the proof, just look at Spain…

What’s propping up Spanish house prices?

Spain has had a horrendous recession. It’s on the infamous “PIIGS” list of threatened peripheral eurozone countries. It has unemployment of around 20%. And there are myriad horror stories of Britons who bought property in the country only to find that their homes were subject to legal disputes, or simply that their pensions couldn’t sustain them when the pound slumped against the euro.

And yet, just as we’ve seen in the UK, the market seems to have managed to take the strain. In the second quarter of 2010, Spanish property rose by nearly 25% to just under 150,000, according to the Housing Ministry. The rise was driven mainly by growth in “second-hand” home sales – up nearly 50% on the quarter, compared to just a 4.6% rise for new home sales.

That may sound impressive. However, sales are nowhere near their bubble-era peak, when figures would have been more like double that. Yet, the toll on house prices hasn’t reflected this. As Fiona Maharg-Bravo puts it on Breakingviews.com, “the Spanish housing bubble isn’t in a hurry to deflate. Prices have held up and are now just 12% off their 2008 peak.” That’s comparable to Britain – if you use Nationwide figures, we’re around 10% off the 2007 peak price for the average British home (and closer to 16% if you look at Halifax).

Yet there are estimated to be about a million empty new-build homes in Spain. Says the FT, “most experts say it could take another three to four years to absorb surplus stock.” And that’s despite a collapse in the number of homes being built, from 800,000 in 2006 to fewer than 100,000 this year.

So what’s behind the surprising resilience of Spanish prices, if not a physical shortage of property? Obviously there are pockets where things are worse – all those horror stories from expats having to sell at huge discounts, for example.

But by and large, what’s propped up prices in Spain is the same as what saved the British property market from harder falls – interest rates being slashed.

Source: www.moneyweek.com

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