Why don’t house prices go down?

Why don’t house prices go down?

2023-10-01 00:27:45

Home sales fell 10.5% in the month of July (it has been falling since February in an interannual rate). It is increasingly difficult and expensive to have a mortgage and the effort that households have to make to purchase a home increases. Despite all this, prices do not drop. They are not falling in Spain because in other European states they are already bursting the real estate bubble, such as the Nordic countries or Germany, where prices have been falling for three consecutive quarters (-9.9% in the second quarter of this year). And here, why do prices resist?

Alejandro Inurrieta, economist, consultant and former president of the Public Rental Company, explains that the housing market is a market of expectations and that currently “the world is full of liquid money, especially from large investors, who see in “The real estate sector is a good investment.” The only one who is holding back from buying is the individual who cannot afford to pay the current prices or have a mortgage. And those are, fundamentally, young people or not so young people who are looking for their first home to emancipate themselves.

According to data from the Bank of Spain, those who buy a house have to dedicate 38.6% of their gross income to it and, given that interest rates and housing prices continue to rise, the effort rate will probably increase. It will be close to 40% – when the recommendation is that it does not exceed 30%. This is the highest rate since the financial crisis that burst the real estate bubble in 2008 and 2009 and 30% higher than just three years ago.

Buying a house is a great effort for most, but the current problem is that those under 40 find it increasingly impossible. The statistics clearly reflect this. In 2006, 72.7% of people between 30 and 44 years old had their own home; now that figure has fallen to 56.7%. And if they are young people between 16 and 29 years old, more than half (56.1%) had their own home in 2006 and now less than a third (30.7%). Therefore, the housing problem goes by neighborhood and by age.

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Javier Burón, former Deputy Minister of Housing of the Basque Country and manager of the Barcelona Municipal Housing Company between 2015 and 2023, highlights that there is a very important generational component when it comes to facing the problem.

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The ‘boomers’ were able to access their own home in the cities (over 65 years old, 90% have their own home), even to acquire a second home, and generation X, those who are around 50 years old, also have solved the housing problem (80% of those over 45 years of age are owners); Although this generation paid for the bursting of the real estate bubble, with the eviction crisis, some have not recovered.

But from 40 years old onwards the situation is very different. They have low salaries, they cannot get a mortgage, if they rent the formula is to share a flat because they cannot bear that expense alone…

All of this has very important social and economic effects, among them the low birth rate that Spain suffers. The shortage of affordable housing condemns almost half of young people to living with their parents. 46% of people between 25 and 34 years old continue in the family home although the majority work full time.


In 2006, half of young people owned their home, now only a third

The director of Institutions and Large Accounts at Sociedad de Tasación, Consuelo Villanueva, emphasizes that “for many years we have had a deficit in new housing.” In 2008, before the bubble burst, 800,000 homes were started annually, now it is less than 100,000, when new homes are around 250,000 a year. This pressure is transferred to used housing, which already accounts for 80% of transactions because there is no new housing.

But for Alejandro Inurrieta it is not the supply that is decisive, but the demand. If employment falls or the economy enters a recession, housing prices will drop, as happened between 2008 and 2013. Or if there were a large public housing stock that would stop the rise in prices.

In Spain the public housing stock is 2.5% compared to 50% in Vienna, 40% in Germany, 30% in Holland or 25% in France. All experts agree on this, the lack of affordable housing (which is basically achieved through public or public-private promotion) is what is altering the market.

These countries, Inurrieta points out, have so much public housing “that the price level remains stable over time and does not fluctuate abruptly like in Spain.” Stable purchase and rental prices. Because in the end it is the rental price that determines the purchase price. And in Spain, the price of rent does not stop rising, driven among other reasons by tourist rentals. If the rent is as expensive as a mortgage and with a tendency to rise, whoever can buy.

Public housing stock

In Spain it is 2.5% compared to 50% in Vienna, 40% in Germany or 25% in France.

And to this is added the strong emergence of foreign buyers, large investment funds and family offices. Villanueva explains that “there is a lot of money from investment funds in the real estate sector” and that the entry of a new player in the second-hand market to invest and then rent “has opened the spigot” in certain niches. But they no longer stay in the most expensive areas. Now these funds are buying in ‘popular’ neighborhoods and extending upward pressure to those areas.

For his part, Ferran Font, director of studies at apartments.com, points out that the rise in prices is slowing down and that between now and the end of the year “the increases will probably be smaller and in 2024 there may be falls but only in the markets where there is no significant demand. “We will go to a more moderate scenario, he says, going from the current increases of 6%-7% to increases of around 3%-4% at the end of the year.” Font also justifies that prices are more resistant in Spain because the increases registered in the last five years in other European countries have been much greater than here.

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The Director of Institutions and Large Accounts of the Appraisal Society believes that public administrations “are finally sensitive to the housing problem and this has been put on the roadmap.” Although “it is not easy or immediate.” Burón is more skeptical, but agrees that tens of billions of euros would be needed to develop the park enough to meet the needs of citizens and it would not be achieved in less than ten or fifteen years.

“We have 380,000 social housing units for rent and three million would be needed,” he asserts. Burón highlights the housing policies developed for decades in the Basque Country and Navarra, where a lot of officially protected housing (VPO) has been built that could not be disqualified or sold (the right to reside in it for 75 years is purchased and then the housing returns to public hands and the circuit repeats).

Other autonomous communities built VPOs that they later reclassified as free housing and their buyers speculated with them when selling them. A policy that has proven to have failed. For Burón, we must reach a “country commitment and an intergenerational pact” because “if no one does anything, and there are more and more 40-year-old people sharing a flat, this will explode.”

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