Bank of Spain warns: new construction and home sales cool down

Bank of Spain warns of cooling in construction and home sales

The Bank of Spain has raised an amber alert in the real estate market: a slowdown in construction execution and property transactions. The news, reported by elEconomista, trinc a summer where construction starts began to fall after a second quarter with a 4% increase. The 8% growth seen in early 2022 is now distant. While not a catastrophe, this breaks the narrative of sustained recovery that had been promoted.

The reaction was immediate. Some see this cooling as a prelude to something worse: a crisis adding to the 2008 one, which never fully closed. Others argue the problem is supply-side, not demand: materials and workers are scarce, while regulatory hurdles abound. Amidst this, data paints a picture of a sector that has become expensive even for those who work within it.

What do the Bank of Spain's figures say?

The supervisory body speaks of cooling, not collapse. Construction activity recorded a negative quarter-on-quarter rate of 0.1% between July and September 2024. Although it recovered in subsequent months to reach 4% in the second quarter of this year, it fell again this summer. Property sales also show signs of exhaustion.

The key figure lies in comparison: the 8% growth from early 2022 has not been recovered. This is the benchmark the sector fails to surpass. The Bank of Spain does not speak of a bubble, but rather of a loss of momentum coinciding with an interest rate environment that, despite recent cuts, continues to weigh on mortgages.

Some read these figures as a simple adjustment after years of increases. Others see the start of something more serious. The debate is less about the data itself and more about its meaning.

Material prices and the shortage of skilled labor

A frequently cited argument is that the issue is supply, not demand. Construction material prices have skyrocketed. A circulating example: a wood stove bought for 450 euros in 2020 cost 750 euros last year, despite being a smaller model. This anecdote illustrates a broader trend.

Skilled labor is scarce. Reports indicate waiting nearly two years just to install a garage door, with locksmiths apologizing because they cannot find assistants or young people willing to learn the trade, even when offering double the budgeted amount. In rural areas, crews simply cannot keep up and select their jobs.

The result is a market where building is costly and slow. For instance, the final price of a new 90-square-meter home in Valencia exceeds 400,000 euros. Used homes, some with issues, do not drop below 300,000. Those in poor condition start at 200,000.

Are all off-plan homes actually selling?

One question hovering over the debate is whether the cooling in sales reflects a real drop in demand or a supply constraint. The answer is not clear-cut. Some claim developers only begin construction once more than half of the units are sold off-plan. If true, the cooling would be less a demand crisis and more a supply adjustment to what can actually be sold.

Others point out that buyers are no longer ordinary Spaniards. Foreign investors, wealthy retirees, and expats living well in Spain are propping up the market. As long as they buy, it appears locals are purchasing en masse. The reality, they say, is that most who want to buy cannot afford to.

Figures circulating in some circles suggest a 40-square-meter micro-apartment with a garage, newly built, in a town near Valencia, including taxes, costs 220,000 euros. Measured against salaries, this price seems prohibitive.

The shadow of 2008 and the 'bad bank'

Comparison with 2008 is inevitable. Back then, the crisis was managed by creating SAREB, the so-called 'bad bank', which absorbed toxic assets from rescued savings banks. Now, some argue this formula is no longer available. Fiscal margins differ, as does public debt levels.

The most pessimistic thesis is that the 2008 crisis was never truly overcome, merely masked by debt and labor devaluation. The economic model wasn't reformed, productivity didn't rise, and dependence on low-value-added sectors persisted. The result, critics say, is widespread impoverishment. The next crisis will likely involve sovereign debt, given global hyper-indebtedness.

Solutions proposed by some sectors remain unchanged: print more money to drive asset inflation. This time, however, in euros, not gold. Inflation serves as a mechanism to devalue debt and extract wealth through taxes. In this scenario, real estate would only suffer if the crisis were severe enough.

Real estate as refuge and silver in hand

Amid this landscape, investment strategies diversify. Some seek refuge in precious metals, such as physical silver. The idea is that housing prices have fallen significantly when measured in gold or bitcoin, suggesting the problem lies in using the wrong exchange mechanism—implying the euro is misleading.

Others still bet on bricks and mortar, albeit with caveats. There is talk that real estate will suffer greatly if a crisis hits, noting that Spain has placed all its bets on this card. Construction is labor-intensive and highly sensitive to interest rates. If credit becomes expensive or demand collapses, the adjustment is swift.

The lingering question is whether this cooling marks the beginning of something larger or just a temporary bump. The Bank of Spain remains cautious. Data points to deceleration. Interpretation depends on focus: on insufficient supply, unmet demand, or money losing value.

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Is this the start of a deep correction or just a temporary stall? The answer, for now, lies in upcoming new construction permits and sales figures.