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DBRS: Spain’s housing market not showing signs of overheating

Despite price growth in key regions, average house prices in Spain are still 19% below their Q3 2007 peak, rating agency research shows.

There is limited evidence of overheating in the Spanish housing market, despite strong house price increases in regions like Madrid, Catalonia and Balearic Islands, according to ratings agency DBRS.

At the national level, while house prices grew at 6.8 percent on an annual basis in Q1 2019, and accumulated an increase of 28.9 percent relative to their Q1 2014 trough, they are still 19 percent below their Q3 2007 peak, the agency said. On a regional basis, house prices have caught up more in some regions than others, but all remain below their respective peaks.

DBRS highlights one of the key differences is the lower level of residential construction, compared with 2007, although development has picked up in recent years. For instance, the number of new permits for constructing houses stood at around 101,000 units in 2018, well below the 866,000 new permits in 2006.

Meanwhile, Spanish banks’ exposure to construction and real estate activities, mainly property developers, is lower than last cycle. The combined exposure to these two sectors at end-March 2019 accounted for only 22 percent of domestic banks’ corporate exposures, down from end-September 2017 when it was almost 50 percent of corporate exposures.

Spanish banks are now taking a more conservative approach to the mortgage market than they did leading up to the financial crisis, DBRS said. One key indicator is the much lower level of new mortgage loans granted during 2016-19, which amounted to €125 billion. This is less than a quarter of the €482 billion originated in the 2004-07 period.

These dynamics reflect both demand and supply factors, but DBRS said it is an indicator of stricter lending conditions in the new cycle.