Saturday, 31 October 2009

Spanish house prices - lower than thought

For a while, the Spanish housing market seemed like Wile E. Coyote -- running over the edge of a cliff, and staying miraculously suspended up in the air until he looks down. While the Spanish boom in prices was bigger than in the US or Ireland, prices have fallen less than 10% according to the official statistics (which nobody believes - too much black money changes hands at the notary office). Because the market is so intransparent, figuring out what people actually pay is not for the timid. A valuation company in Spain, Tecnocasa, tried to take the bull by the horns, so to speak. Their report finds that the smallish price declines are partly the result of unmeasured quality changes. Put another way -- prices have come down much more than we think. It's just that people bought an awful lot of really terrible homes at the height of the boom. Today, the same people buy something much nicer. The compositional shift - towards more high-quality homes, with luxury amenties like an elevator - is not properly captured in statistics on sale prices. As you can see from the table, once you adjust for price, Barcelona housing is down over 20% instead of the unadjusted 14% (yoy). Not all figures are equally believable; I am hard-pushed to find a decline of 51% in Valencia credible. Be that as it may, I find the economics quite interesting -- the more desperate people were at the height of the boom, the more rubbish they bought. If the quality gradient is steep, then compositional shift will lead to illusory house price stability.
Do I believe it? Only partly. Housing in Barcelona still costs more per square meter than in Manhattan. If you compare like with like (Village=Born, Eixample + Saria = Upper East Side, etc.), the premium is about 20%-30%. The weak dollar helps, but be that as it may -- salaries are very low compared to Manhattan ones, relative to house prices, and the financial system is certainly no better in producing sustainable house prices than in the US (30 year fixed mortgages, anyone?). So the quality adjustment may be part of the story, but the underlying mispricing is still Elephant-sized, if you ask me.

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