Bank of Spain sees housing imbalance at up to 8.5%

Bank of Spain sees housing imbalance at up to 8.5%

The Bank of Spain has quantified the distress in the property market. In its latest financial stability report, the institution led by José Luis Escrivá warns that average housing prices in Spain ended 2024 slightly above their long-term equilibrium level, with an estimated imbalance ranging from 1.1% to 8.5%. Six months earlier, this range was between 0.8% and 4.8%. The gap has widened at both ends, which is significant: it is not that the supervisor changed its mind, but rather that the models used to measure the divergence between prices and economic fundamentals have started to spike.

The diagnosis comes with data. The central bank estimates a cumulative deficit of up to 450,000 homes needed to absorb current demand. Sales are at highs, new construction is at lows, and the population is growing faster than housing supply. This combination has a technical name—supply-demand mismatch—and a more colloquial one circulating widely: bubble.

What exactly does the Bank of Spain measure?

To reach this conclusion, the supervisor cross-checks four indicators. The first is the housing price gap, comparing observed prices with those corresponding to long-term fundamentals. The second is the ratio between prices and household disposable income: how many years of salary a house costs. The third is an ordinary least squares model estimating prices based on disposable income and mortgage interest rates. The fourth is a technical scenario correcting for error, adding fiscal effects to the same variables.

None of these four are infallible. Economic models are compasses, not GPS. But when all four point in the same direction and the range widens in six months, the warning ceases to be rhetorical.

Why the supply deficit isn't closing

The most repeated argument explaining rising prices is a lack of construction. Since 2008, the sector has not recovered anywhere near its former pace. Some argue that around 500,000 homes per year are needed, yet not even a fraction of that number is being built. The Bank of Spain has indeed estimated the deficit at up to 450,000 units to meet demand.

The second factor is demographic. Spain's population grew from 43 to 49 million inhabitants over two decades, while the rental regime expanded from about 5.6 million people in 2005 to roughly 10.8 million in 2025. This shift is not just a change in preferences; it exerts direct pressure on the available housing stock, especially in areas where employment is concentrated.

Those denying the bubble vs. those antiestéticaring it

There is no consensus. One school of thought argues this does not resemble 2008 because banks no longer grant mortgages exceeding 80% of appraised value, require solvency, and vet developers through off-plan pre-sales. Without easy credit and over-leveraged developers, they argue, there is no mechanism for financial contagion. Prices rise because supply is scarce, not because credit is irrational.

The other school looks at the rental market and sees a bomb. Sales may be controlled, but rents have skyrocketed, concentrating fragile households. If unemployment returns to Spain's historical levels—currently 11%, though the multi-decade average is higher—the number of evictions could multiply. Some speak of between 50,000 and 100,000 annual occupations in a crisis scenario. The full calculation, including tenant population trends and unemployment evolution, presents a picture far more uncomfortable than the Bank of Spain headline suggests.

Land, taxes, and the State as culprit

A third line of analysis points to the regulatory framework. Urbanizable land is heavily restricted, housing taxation is high, and occupation is tolerated with varying degrees of leniency depending on the autonomous community. In this narrative, the State is not the market referee but the primary reason supply fails to respond. It is argued that barren hectares surround any city but remain unparcelled due to lack of political will, pushing buyers toward established centers and driving up prices via displacement effects.

The counterpoint is that liberalizing land without planning produces another kind of disaster: the uncontrolled bricklaying of the previous bubble. No one has yet solved this square-the-circle problem.

The disorienting data point

The Bank of Spain does not say something will burst. It says the average price is above its long-term equilibrium and that the imbalance has widened in six months. The difference between these two statements is the same as between a diagnosis and a forecast. And in Spain, historically, we have been much better at detecting the former after the latter had already passed.