Spanish housing boom near peak?

Spanish housing boom near peak?
31 August 2006

The Bank of Spain calculates housing prices, after five years of double-digit increases, are overvalued by about 30 per cent. Empty homes around the country suggest the market is close to peaking. Spain’s local governments rely on revenue from building permits and taxes, leading some to get caught up in a speculative boom. Spaniards, betting house prices will continue rising, increasingly buy homes purely as investments. Builders, betting more buyers will come forward, continue drawing up projects. Some officials are suspected of bending the rules to favor rapid development.

The danger is this could take speculative investment too far at a time of rising interest rates, causing a sharp construction correction and likely derailing Europe’s fastest-growing large economy.

"The large speculative component will intensify any problems in the market," said Manuel Romera, finance professor at Madrid business school Instituto de Empresa. "If things start to go wrong, suddenly all the speculators will put their properties up for sale. It will produce a chain reaction."

Several factors support strong demand from home buyers, including population and job growth and a rental market hobbled by lack of legal security for those who put their homes up for rent. Nonetheless, economists point to the large number of secondary and unoccupied residences as evidence of a large portion of speculative investment.

The Bank of Spain says out of a total of 22.5 million homes in 2004, four million were secondary residences, primarily vacation homes for Spaniards and other Europeans; 3.5 million were unused, though some observers say many of the empty residences might be rarely used vacation homes.

Recent indicators show a 15% annual rise in March cement consumption, a five-year high, and a rise in first-quarter construction investment of 7.4%, an acceleration from the nearly 6% pace posted in 2005. A quick turn to bust for Spain’s housing market would be felt throughout the economy. Construction is Spain’s largest industry, accounting for 17% of gross domestic product and 14% of total employment.
Published under Cement News