That Spanish housing market

On the left, the latest Spanish home sales data. Ignoring (for reasons we'll outline at the end) that bad August showing, they've had a relative good run in 2014 - especially when you consider that, for the first time since 2010, there have been no significant pre-announced changes in the tax treatment of homes to provide temporary boosts to transactions.

The only fishy data point this year is to be found in January when a bulk sale of 6,000 rental-with-option-to-purchase units was noted in Madrid. Pure rental would normally not make its way into this series, but the option means that each apartment had already been segregated into its own individual deed.

Despite the January and February 2013 spike, related to those same tax change sales at the end of 2012 (the registry data shows a 2-month delay relative to actual transaction dates), 2014 sales are on track to beat last years figures.

Prices, in our opinion, may also be bottoming. The second chart shows the Tinsa IMIE index. A dip to a new low in August doesn't really contradict the evidence that they've been fairly flat over the course of the year. By early 2015, this should show up in year-on-year comparisons. There are, of course, numerous home price measures each with their own methodology. Some are already showing increases, others displaying worse data. We've chosen Tinsa because it's widely quoted and very accessible.

Arguments against the stabilization of prices generally centre on the supply of unsold homes and Spanish demographics. Lots of flats and who's going to buy them, put simply. Obviously, we don't find this entirely convincing. For one, although José takes a bit of umbrage with this, we're not sure that the 'natural' demand for Spanish housing can be fixed with any precision. There is no historical data series that does not start and finish in the bubble and its aftermath and you just can't superimpose data from another country. It's a cultural thing, as they say - property ownership is the measure of wealth and well-being in Spain. The six families resident in the middle class apartment block in which this writer lives own a grand total of 15 homes between them..., for example.

More important even is the position of Spanish banks. They - through repossessions, debt-for-equity transfers, their control over financing and their privileged access to the most likely customers - have a complete stranglehold on the home sale business. It is no coincidence that prices are flattening slightly above the 45 percent provision mandated by the Bank of Spain for residences on bank balance sheets. Spanish banks will, quite simply, not be taking losses on their inventory. They can't afford to and prices are now low enough that they can force the customers to come to them.

As for competition from non-bank sellers - between owners having exaggerated notions of the value of their patrimony, complete lack of access to financing and the likelihood that the financially-strapped forced sellers are already long gone from the market, we don't think they are a real factor.

A few notes:

1). August economic statistics (including Spanish home sales) have been horrific all over the euro zone. This suspicious unanimity, we believe, will be revealed to be partly attributable to the curiosity of that month having started on a Friday and containing five full weekends. Working day and calendar adjustments aren't taking into account the effect this has had on vacation date choices.

2). Readers might note the recent rise in sales of used homes and the decline in new. This is a methodological issue centred on the definitions of the two categories. The divergence has no significance whatsoever. Inquisitive readers can find out exactly how that works in this old entry.

3). There is, in fact, another tax change on the horizon. As of January 2015, the capital gains rate on sales of second-hand homes will increase. Inevitably this will have a negative effect on prices leading up to that date and may also increase actual sales, but we don't think the result will be significant. Aside from this tax grab being mainly directed at homes purchased prior to 1994, virtually everything bought since 2003 is underwater anyway. Here's a calculator, if you're interested.

4). It's also difficult to estimate the potential impact of large-scale purchases of covered bonds by the ECB. It's certainly going to be positive, but in the case of a conflict between mortgage issuance and loan-loss provisions, the latter win unless the authorities ease up a bit - something we don't see as very likely.

5). Some are predicting that Europe is about to enter into recession in short order. We'll cross that bridge when we come to it. 

 

Charles Butler, with contributions from Javier García Echegaray and José Domingo Rosello.