8 out of 10 Experts Do not Believe a New Real Estate Bubble is Possible, According to the VIII Valuation Observatory.

Last May 9, the Spanish Association of Value Analysis (AEV) presented its VIII Valuation Observatory, a report involving the companies that comprise it, including Euroval, along with 4 independent experts: Irene Peña, Santiago Carbó Valverde, Julio Rodríguez and Juan Velayos.

According to real estate experts, circumstances are occurring in large cities that could lead to new local bubbles in the coming months, although they are fully convinced that a new real estate bubble will not occur at the national level. Along with these statements, the average price growth of 4%, a significant lack of supply that makes it impossible to configure a healthy housing market, renting as the main alternative given the difficulties in recovering demand, and the change from monetary wealth to real estate wealth are the main conclusions of the VIII Valuation Observatory corresponding to the second half of 2017, which is presented by the Spanish Association of Value Analysis (AEV) in collaboration with the professor and head of the Department of Applied Economics of the University of Alicante, Paloma Taltavull, and a group of twenty experts formed by the appraisal companies that are members of the association and other recognized professionals in the sector.

This eighth Observatory addresses for the first time the possibility that a new real estate bubble may take place in Spain. The report explains how the intensity of price growth and decrease is key to the classification of a bubble, so that it would form if prices doubled within five years and increased by 50% in three, and then collapsed to the original level in a short time. Based on this definition, the data on price variations experienced by homes in Spain in the last cycle should not be considered drastic: in the last three years, prices have grown by 5.3% in total, while, in the seven years prior to the peak, prices increased at a rate of 8.8% per year, and then fell at a rate of 6.5% per year between 2007 and 2014. From this perspective, the statistical information does not reflect the possibility of experiencing a bubble in the coming periods, an assertion that is supported by 85% of the experts consulted (88% of the appraisal companies and 75% of the external experts).

Three-quarters of the Experts Consider a Local Bubble in Madrid and Barcelona Feasible

In contrast, real estate professionals differ to a greater extent when talking about a possible local bubble. When the study analyzes the regional data, it is seen that only the provincial capitals of the Balearic Islands, Cantabria, Catalonia, Galicia and Madrid show gross growth rates higher than 5% in the three years, while the rest present very small or still negative increases in residential prices. As a strong revaluation in those areas where demand is concentrated cannot be ruled out, the possibility of a slight price bubble taking place is opened, given the difficulties of access to purchase for most households that could be effective demanders. In addition, the report details how in markets with strong growth in rental prices it is possible that the tension will continue to increase until reaching the maximum payment capacity. The report suggests that, if this occurs, households will not be able to rent, vacant units will remain in this market and demand will move towards other nearby markets, originating the traditional contagion effect of residential prices in the territory. When asked about this greater recovery in cities such as Madrid or Barcelona, three-quarters of the experts are in favor, predicting that the rise in rental prices will have contagion in sales prices, since families who have been living in rented accommodation may feel that with the same budget they can access the purchase of housing in the periphery of the cities.

With regard to prices, the report details that the general trend is a moderate expansion of average prices. In the estimation that has been made on the probable values for 2018, initially there does not seem to be any indication of acceleration, not even in the values of new housing. Thus, average prices follow the values of existing or second-hand homes, which are the majority units subject to transaction. The prediction of nominal values shows a continuation in the rate of growth of average prices up to almost 4% during the beginning of this year, but a subsequent slowdown, without new homes, for their part, showing a relevant revaluation on current prices. This statement is only corroborated by 55% of those consulted, with nearly half of the experts disagreeing and arguing that there are clear signs of price increases in increasingly extensive areas that represent almost 40% of the Spanish population and a clear trend towards price increases throughout 2018.

The reduction in the number of development companies and the increase in their risk aversion, the disappearance of incentives for the construction of public housing, and the continued decrease in financing for construction and incentives from the market are shown in the report as the main causes of the existing shortcomings to configure a healthy housing market, with a shadow of severe lack of supply that may have the effects of scarcity that the United Kingdom experienced during the first decade of the 21st century. This belief receives the support of 50% of the AEV member partners and 25% of the independent experts, and their opponents mention the learning carried out after the crisis and the professionalization and good work of the sector to reason that what happened in other European countries will be avoided in Spain.

For 75% of the experts, renting is the best alternative given the difficulties in recovering demand

When talking about demand, the report highlights the difficulties it encounters in recovering: employment continues its growing path but in a very volatile way among young people, which, added to incomes that lose purchasing power, makes the recovery of confidence complex and slow. In these circumstances in which the demand in the market does not have the capacity to pay, three possible effects arise: focusing on renting, the alternative with which most experts agree (75%); dragging prices according to it, the option mentioned by 35% of those consulted, and finally, requiring public housing and aid, the possibility supported by 20% of the professionals.

Half of the professionals affirm to agree with the forecast of price growth of 4% and a subsequent slowdown

The report also talks about another reality of the market: that of households with sufficient savings, who are taking advantage to buy homes, exchanging monetary wealth for real estate wealth, driven by the progressive increase in income and the economic improvement that coexists with the still low prices of homes. Thus, two possible interpretations are detailed for the low loan-to-value (LTV) ratios that have been experienced: that it is due to a phenomenon of buying second homes with the help of credit, or that there is still a strong credit restriction. These arguments of the Valuation Observatory report receive minority support, from a third of the professionals, and other alternative causes are offered, such as that the majority of buyers correspond to intermediate-age population groups for replacement, which implies less demand for financing, that the large number of transmissions are attended with own resources, especially by small investors who are looking for an alternative to their savings, or that banks have assumed a more conservative attitude.

In the words of Paloma Arnaiz, General Secretary of the AEV, “the opinion of our panelists aligns with the general mood of the sector, which does not foresee the appearance of a price bubble at the national level, although it remains attentive to local phenomena to which, of course, it is necessary to be cautious. In general, we can say that this real estate cycle is evolving in a totally different way to the previous one, since it is based on new ways of investing, financing, promoting and building that mitigate the risk of repeating the errors that led to the past crisis. It also seems clear that the challenge of this new stage will be to learn to play with renting as an increasingly widespread option, which requires a new mentality on the part of all the actors in the market”.

The economic situation report of the Valuation Observatory is prepared periodically and aims to collect the open debate between the members of the AEV and a group of experts outside the valuation companies on issues related to the evolution of the real estate sector in order to involve the market and society in the results.

This report and others of general interest are available to the public on the AEV website.

http://www.asociacionaev.org/observatorio-de-la-valoracion.htm