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Spain 2019. The real estate sector. What can we expect in an economic slowdown scenario?

 

Investment in construction: +3.5% in 2019e

We expect investment in construction to post a +3.5% increase in 2019e and 2020e. Investment in residential construction may outperform other constructions once again, although its growth rate may decline to +3.8% and +3.5% in 2019e and 2020e after the +7.6% in 2018e.

From tail winds to head winds

We expect GDP growth to slow down to 2.4% in 2019e and 2.3% in 2020e although the speed and depth of this deceleration has yet to be confirmed as we are at the very early stages of this process. In this context, average employment creation would be reduced to +1.9% in 2019e (from +2.4% in 2018e). We believe that as long as the economy grows above the break–even point of employment creation (that we estimate at 0.7%), residential construction will be in the positive territory. In addition, we expect the ECB to raise the intervention rate in 2H19. 1yr. Euribor, currently at –0.17% (+2bp in Aug., 2018) should start its upwards trend in the forthcoming months impacting negatively to the cost of mortgages. According to our figures, a 50bp increase has a +5.5% impact in an average mortgage (€120,000) monthly payment (or c. €60/month). These two variables are to be monitored closely to evaluate its impact on the economy.

New offer is still below the run–rate level

In our view, the residential construction sector may continue growing at above–GDP rates because finished houses (54,000 in 2017) are still below the structural demand (100,000). Housing starts may reach the 100,000 threshold in 2018e (81,000 in 2017) and, due to the duration of the construction process, they will not be transformed into finished houses until 2020e or 2021e. This fact, coupled with the reduction of the empty stock, leads us to believe that a sudden–stop in the sector is unlikely to occur even in a scenario of a more pronounced GDP decline that the one factored in our estimates.

Has a selective bubble in prices been built in some regions?

Average housing prices have increased +7.6% from trough to 1Q18 according to the Ministry of Civil Works (but +23.9% according to INE!). The +7.6% rise masks a major divergence in the evolution of prices between tourist zones and large cities vs. the rest of Spain. Madrid (+21.8%) or Balearic Islands (+22.7%) lead the race while Cantabria (+0.0%) or Castilla–La Mancha (+0.0%) are the laggards. Consequently, as an average, we expect prices to increase +3%/+5% in 2019e and 2020e although we suggest to be cautious in those regions where prices have already boomed.