Could the housing bubble be back in former eurozone basket cases Ireland and Spain?
The two countries were members of the infamous PIIGS (Portugal, Ireland, Italy, Greece and Spain), which until not long ago were believed to get into big economic trouble.
But now it seems that due to the positive effects of the various forms of quantitative easing carried out by the European Central Bank (ECB) to ease the crisis, house prices in these two countries are bubbling up.
Well, maybe using the expression “housing bubble” is too much, at least in the case of Spain. Jack Allen, an assistant economist at economic think-tank Capital Economics, says that in Spain “there are some very early signs that the housing market might be beginning to recover… it appears that prices have stopped falling and may have begun to rise again recently.”
In the last quarter of 2014, the Spanish house price index increased by 1.8% from a year earlier. It was the fastest increase since the financial crisis hit in 2008, pushing property prices in Spain down by more than 50%.
What’s different in this recovery for Spain is that this time, it is not the housing sector that is driving the recovery, but the recovery that is driving the housing sector.
Yvan Mamalet, an analyst at Societe Generale, revised upwards the bank’s forecast for economic growth for Spain for this year to 2.4% from a previous 2% estimate.
The main driver for this economic expansion will be domestic demand, although Mamalet warns that “looming political uncertainties” are likely to weigh on investment and business confidence.
Spain has elections later this year, and the fears of a political deadlock are increasing. Anti-austerity party Podemos, which has been compared with Greece’s Syriza, won 15 seats in local elections in Andalusia in March, emerging as a strong force in the upcoming polls.
Because of this, structural reforms to step up Spain’s growth are unlikely even after the election. “With rising odds of a political gridlock after the elections, we do not foresee any large fiscal consolidation efforts or structural reforms after the elections,” Mamalet wrote in a recent note.
He expects economic growth in Spain to slow to 1.7% next year. This does not bode well for the nascent recovery on the housing sector.
“Admittedly, new house building looks set to remain weak. Permits for new housing construction slumped after the crisis and have trended downwards since then,” Allen said.
At the end of 2013, the stock of unsold properties was 563,908, or approximately 2.2% of the total housing stock, Allen noted.
“And there is also likely to be a stock of unfinished properties that were started during the housing boom,” he said. “This should limit the impact of rising demand on prices.”
So, don’t make plans about that castle in Spain just yet. What about the Irish mansion?
In Ireland, house prices returned to positive growth in mid-2013 and were up by more than 16% in March – but were still more than 35% below their 2007 peak.
However, the pace of the increase – which put Ireland on top of an index measuring house price growth last year, ahead of emerging markets like Turkey or Kazakhstan – has prompted some critics to warn of a bubble forming again.
Some unlucky homeowners are still dealing with the effects of the previous bubble. Talk about using taxpayer money to bail out people who can no longer afford to pay their mortgages is already creating some tension.
The risk of a bubble developing in Irish home prices over the next few years is “fairly small” too, in Allen’s view.
He notes that the fast rise in Dublin home prices – of more than 21% — pushes up the average, while house prices at a national level “do not look overvalued relative to incomes.”
Besides, lending is still falling, while the Irish central bank adopted tougher macro-prudential measures in late January, such as a 15% limit on the value of mortgage lending that can exceed a loan-to-income ratio of 3.5 and a 20% limit on lending that can exceed a loan-to-value ratio of 0.8.
“While the risks of a housing bubble are bigger in Ireland, valuations do not look stretched and recent policy changes should help to constrain riskier mortgage lending,” Allen concluded. “Accordingly, housing crashes are unlikely to bring these economies’ recoveries to an end.”