Property Works 3/4 2013 report – Spain and Balearics



The global house-price boom that preceded the financial crisis was remarkable for its scope and scale. With very few exceptions, there seemed only one way for prices to go: up. Things have been more diverse since a brightening outlook for America stands out against the darkening tones of the beleaguered economies on the periphery of the euro area, and Spain in particular.

Following The Economist’s data, world-wide house prices are currently rising and falling in equal numbers. Over the past year, prices jumped most in Hong Kong (an astonishing 21%), prompting government efforts to cool the market. Meanwhile, they dropped by 9.3% in Spain, the heaviest faller (The Economist’s data differ from other data, which we believe to be more accurate with respect to Spain, quoted below in the present report). The overall trend is down, however, since in three of the countries where prices are rising they are doing so at a slower pace than a year ago—in Canada, for example, they are up by 3.3% compared with 7.1% 12 months ago.

To gauge whether homes are over or under-valued, The Economist uses two measures. The first is a price-to-rents ratio. This is analogous to the price-earnings ratio used for equities, with the rents going to property investors (or saved by homeowners) equivalent to corporate profits. The measure displays a massive range, from a whopping 78% overvaluation in Canada to an undervaluation of 37% in Japan.

The other measure, the ratio of prices to disposable income per person, stretches from a 35% overvaluation in France to a 36% undervaluation, again in Japan.

America’s housing-market revival looks sustainable in part because the sharp correction in house prices over the past few years has made homes cheap by historical standards. A year ago house prices were still falling, by 3.6%. There has been a turnaround since: the latest data show prices rising by 4.3%. But based on the ratio of prices to rents, houses are still 7% undervalued; judged by the price-to-income ratio, they are 20% below fair value. It also helps that mortgage rates are at historic lows.

Homeowners may be coming up for air in America, but their plight is deepening across much of Europe. The agony is most acute in Spain, but other big euro-zone economies are also heading in the wrong direction. In Italy and the Netherlands the pace of decline has quickened; in France prices are now edging down after a brief recovery.

European valuations are most stretched in France, by as much as 50% judging by rents and by 35% on the basis of incomes. This compares with around 20% overvaluation on both counts in Spain, despite the price falls to date. But, according to The Economist, any house-price collapse in France is likely to be modest compared with Spain’s. Spain’s bust reflects a massive oversupply of housing built in the construction boom, and an unemployment rate that rose to 26.6% in November 2012, the highest in Europe. France’s unemployment rate has edged up to 10.5% but that is in a different league to Spain’s; its banks are in better shape than Spanish ones, too. We will analyze the Spanish data more in depth below.

The anomaly among Europe’s big economies is Germany, where house prices are rising by a restrained 2.7%, the same pace as a year earlier. Homes there are 17% undervalued compared with historical averages on both The Economist’s measures. German purchasers can benefit from rock-bottom borrowing costs, unlike their counterparts in peripheral Europe. One of the lowest rates of unemployment (5.4%) in Europe further underpins the housing market there.

British house prices have posted only modest overall declines over the past five years, although rising rents and incomes have also helped bring things closer to fair value. But the British market may do rather better than still-stretched valuations suggest. For one thing, it does not suffer from the glut of empty homes that has created ghost towns in Ireland and Spain. And according to the Bank of England’s latest credit-conditions survey, lenders are more willing to make mortgage finance available than at any time since the financial crisis.