What is the most likely scenario for the property market?
Empirically, house prices are notable for being very highly self-correlated (expectations feed reality and vice versa), making it hard to identify turning points.
Although few would dispute that property is overvalued, it remains to be seen when the property market will adjust and whether it will take the form of a bubble suddenly bursting or a soft landing. The price slowdown seems to be happening already, with the year on-year rate steadily declining since the end of 2003. Peaking at that time at 18.7%, it was 12.8% in Q4 2005. Like, some Spanish banking establishments, we foresee a marked slowdown this year.
Monetary erosion and nominal prices
If prices were to merely stabilise they would return to their fundamental values more quickly than in other countries in which house prices are overvalued to a similar extent (around nine years with average inflation of
3%, versus 13 years in a country with average annual inflation of 2%).
Although house prices stabilised between 1991 and 1997, values dropped 19.8% in real terms. Meanwhile, French house prices fell 5% nominally
and 11% in real terms. Between comparable points of the 1989-1995 property cycle, UK house prices lost 14.5% in nominal terms and 35.6% in real terms.
The fact remains that cyclical downturns for residential property last less than nine years with an average of five to seven years, suggesting a slight
adjustment to nominal prices during this time.
Our scenario is that of a soft landing with a limited drop in nominal prices. However, further price growth – still likely in 2006 if the ECB raises its key interest rate very moderately – heightens the risk of a subsequent
correction.
What future for the Spanish housing market?
http://economic-research.bnpparibas.com/applis/WWW/recheco.nsf/ConjonctureByDateEN/ACDEBDB7BE42AD85C125713200476351/$File/C0603_A1.pdf?OpenElement#search=%22bubble%20house%20spain%20madrid%20pdf%22
Empirically, house prices are notable for being very highly self-correlated (expectations feed reality and vice versa), making it hard to identify turning points.
Although few would dispute that property is overvalued, it remains to be seen when the property market will adjust and whether it will take the form of a bubble suddenly bursting or a soft landing. The price slowdown seems to be happening already, with the year on-year rate steadily declining since the end of 2003. Peaking at that time at 18.7%, it was 12.8% in Q4 2005. Like, some Spanish banking establishments, we foresee a marked slowdown this year.
Monetary erosion and nominal prices
If prices were to merely stabilise they would return to their fundamental values more quickly than in other countries in which house prices are overvalued to a similar extent (around nine years with average inflation of
3%, versus 13 years in a country with average annual inflation of 2%).
Although house prices stabilised between 1991 and 1997, values dropped 19.8% in real terms. Meanwhile, French house prices fell 5% nominally
and 11% in real terms. Between comparable points of the 1989-1995 property cycle, UK house prices lost 14.5% in nominal terms and 35.6% in real terms.
The fact remains that cyclical downturns for residential property last less than nine years with an average of five to seven years, suggesting a slight
adjustment to nominal prices during this time.
Our scenario is that of a soft landing with a limited drop in nominal prices. However, further price growth – still likely in 2006 if the ECB raises its key interest rate very moderately – heightens the risk of a subsequent
correction.
What future for the Spanish housing market?
http://economic-research.bnpparibas.com/applis/WWW/recheco.nsf/ConjonctureByDateEN/ACDEBDB7BE42AD85C125713200476351/$File/C0603_A1.pdf?OpenElement#search=%22bubble%20house%20spain%20madrid%20pdf%22
