Local demand stabilises Spanish market

Everybody loves a sustained housing-market recovery. It creates a virtuous circle that increases wealth and confidence, which one hopes doesn't get out of hand before turning into a bubble.

But despite an increase in foreign demand for homes in Spain, there will be no sustained recovery until local demand comes back to life. So what signs are there of a recovery in local demand, if any?

The overall market has stopped shrinking in sales terms, rising in six of the last seven months, and no change compared to last year over the first nine months. It may not sound like much, but it's almost the first time in seven years that the Spanish housing market hasn't shrunk, and is the first sign of a potential recovery.

Growing foreign demand is partly to thank for this, and foreign buyers now account for 13 per cent of the market, compared to 8 per cent in 2007, and just 4 per cent in 2009. Foreign demand is diversified, but more flighty than local demand, and in normal market conditions foreign demand was never more than 10 per cent of the market.

But economic conditions have been far from normal these last five years. The economy has been in, or close to, recession since 2008, unemployment stands at 24 per cent and mortgage lending has collapsed by about 85 per cent compared to the peak in 2006. Demographics are part of the problem.

The Spanish population has been shrinking in recent years as immigrants go home, and locals emigrate in search of work. The population shrank 0.5 per cent in 2013, and 0.2 per cent in 2012, compared to an increase of 1.25 per cent in 2008. The population shrank last year in every region bar the Canaries and Balearics, weakening demand in many segments. So what about the key economic drivers of GDP growth, jobs, and mortgage lending, which also contribute to housing demand.

How are they performing?

At long last there seems to be light at the end of the tunnel of Spain's recession, with GDP growing an annualised 1.6 per cent in the third quarter of the year, and Spain expected to deliver some of the highest growth in Europe next year. Many Spaniards are still suffering the crisis, and a fragile recovery could still be blown of course, but things are starting to look up.

Unemployment is falling, down from a peak of 27 per cent at the start of 2013, and down 2 per cent over 12 months to the end of September. People with jobs can start families and afford mortgages to buy homes, otherwise they have to live with their parents.

And mortgage lending has been growing at vigorous rates in recent months. Now, after almost seven years of relentless declines, banks have started lending between 19 and 30 per cent more each month since June.

Banks lend more when they believe that homes make good collateral, implying they don't expect prices to fall further. So the increase in lending means more money chasing homes, and more optimism about house prices, all of which is good news for local demand. Of course four consecutive months of double-digit growth in mortgage lending isn't long enough to call the end of Spain's mortgage drought. We need six months at least.

So it looks like the main drivers of local housing demand are starting to turn the corner, or at least stop deteriorating. And recently a new trend has emerged driving local demand for second homes on the coast, namely Spanish cash buyers seeking second homes as part of their pension plan. One of the biggest chain of estate agents reports that 10 per cent of their customers now fit this profile.

Like us, Spaniards are turning to second homes as investments. These buyers plan to downsize when they retire, and rent or sell their current home to supplement their pension income. Which means their requirements are changing in favour of bargains in locations with good amenities, with less emphasis on proximity to the beach. Such buyers don't really care which region they buy in, so long as the price is right, and amenities are open year round.

So yes, on balance, there are signs that local demand is coming back to life, and demand is changing in ways that will benefit some types of housing more than others. This should help stabilise the Spanish housing market, and make property a safer investment in terms of liquidity and pricing. It will not be enough, however, to make the market boom again anytime soon.