Key points

• The majority of Spain’s economic indicators have been revised downwards: a mood of caution exists, but there are still expectations of construction sector growth.

• The demand for housing, an important element in determining building companies’ expectations, has been affected by high prices and the uncertainty surrounding mortgages.

• On the other hand, there are hopes that activity in the construction of homes to let could see an upturn, given the shortfall in availability identified by some housing developers.

The evolution of the construction sector in Spain

El The Spanish construction industry no longer occupies the position it enjoyed during the past decade. According to figures from the INE, the sector’s contribution to Spain’s GDP during 2006 was 10.8%. At the end of 2018, this figure stood at 5.6%, after remaining unchanged at 5.2% in 2014 and 2015.

From the point of view of employment, at the end of 2018, the number of construction industry jobs accounted for 6.3% of the total. By contrast, the industrial sector accounted for 14% and the service sector for 75.5%.

Confidence in the construction sector

The Construction Confidence Indicator (ICC), a qualitative measure obtained through the Business Confidence Survey in the construction sector undertaken by the Ministry of Trade and Tourism, represents the average balance of replies from the companies in the sample on the current position of their order books in the reference month and the employment prospects for the next three months. The index can have values between -100 and +100. 

In September 2019, it stood at a level of -2.9 points. This is 14.1 points higher than the previous month, although it is 12 points lower than in September 2018. The order book is the variable having the strongest negative impact on the index, which has also been weighted against the Industrial Gross Value Added of each sector: building construction: 43.1%, public sector construction projects: 39.2% and specialist construction activities: 17.7%.

Construction finance and changes on property funding

A significant factor that could affect the pace of construction is the financing of housing. In June this year, the new Mortgage Law came into force. This is intended to guarantee protection for consumers when signing up for a loan.

Under the new rule, the authorities, both at a national level and at Autonomous Community level, would ensure that customers understood the contracts they were signing, and would not be vulnerable to unfair clauses. This law applies to contracts for mortgage loans where the borrower or guarantor is a physical person, and the mortgage applies to residential buildings. It also applies when the loan is for the purpose of acquiring or maintaining property rights over plots or buildings which have been built, or are to be built, provided that the borrower or the guarantor is a consumer.

An important aspect of the changes implemented is stricter requirements on creditworthiness, in order to reduce the risks of non-payment. The new law sets limits on the early repayment commission charges, and imposes maximum levels. In addition, the banks become responsible for the notary expenses, registration and administration, and for the Stamp Duty. The customer bears only the valuation costs.

According to a study by Bankia, State of the housing market. September 2019, after June’s uncertainty and slow-down, when the law was implemented, mortgage lending revived in July and registered the highest increase in four months. However, the average amount involved in the contracts is more modest than a year ago, with a drop of 2.5%, and in some areas the decline has reached double figures (Balearic Islands -24.4%, Murcia -19.3%, etc.). This regional variance is a significant factor when decisions are being made.

Construction industry growth: Prices

House prices continue to climb, particularly where new houses are concerned. According to the BCE, in Spain’s case, the price is not, on average, very far from the equilibrium value (if there is any over-valuing, it is slight). This may be consistent with the general forecast of the BBVA study, which states that it expects that the reduced buoyancy in transactions will result in a moderation in the increase in prices.  

On this point, the Bankia report highlights that although prices remain 20% lower than the 2008 levels, they are approaching their long-term equilibrium, making housing less affordable, particularly for younger people seeking their first home. The housing market has entered a mature phase of its cycle; the pace of sales is slowing, and stands at around 520,000 annual transactions.

New construction for rent

According to David López-Rodríguez and María de los Llanos Matea of the Bank of Spain’s General Finance and Statistical Department , recent years have seen a growing tendency in favour of renting in the Spanish housing market. The rental market is increasingly important and buoyant in certain demographic groups (young families, immigrants and temporary workers) and in certain specific geographical areas (Madrid, Catalonia, the Balearic Islands and the Canary Islands). The decrease in the average loan-price ratio in new mortgages, the concentration of financial activity in geographical areas with a fixed offer of housing, and the taxation relating to housing could well be other factors contributing to a significant increase in demand in the housing rental market.

According to El País, the construction sector economy is expecting a future demand for building homes for rent. Estimates of demand begin at a minimum figure of 90,000 homes annually, mainly for new builds, which can be offered for rent to satisfy this need. The developers’ organisation APCEspaña has calculated that around 120,000 new homes for rental will be needed over the next decade.

Shaping the future of construction: Construction industry forecast

In the macroeconomic projections published in September by the Bank of Spain for the 2019-2021 period, many indicators have been revised downwards. Growth in GDP is projected to rise by 2% in comparison with the previous forecast of 2.4%. Investment in construction is viewed as healthy for 2019, with expected growth of 2.3% and 3.9% for 2020. This, however, represents a reduction in the initial forecasts of 4.6% and 4.3%, respectively.

According to the summary of the Euroconstruct report,  the construction sector has not forgotten the experience of the spectacular downturn after 2007. No-one can guarantee that it will not be repeated. There is, however, one significant difference: recent years have not seen production excesses that need to be corrected, and there remains a margin for continued growth while there is no major slowdown of the economy. However, a less dynamic economy is consistent with forecasts of progressively shrinking growth for the sector.

While the economy is driven by a sustainable demand, it is possible to envisage a moderately active year for the construction sector in 2020. Find out how the picture could be affected by other factors, such as the impact of the political uncertainty (Link interno al artículo de LaCalle). Another factor put forward that could prove crucial is possible shocks at international and European levels and the political uncertainty, which could determine the direction of fiscal and monetary policy (as well as the expectations of consumers and developers), and the pace at which major public sector construction projects are undertaken.

FUENTES

Bank of Spain. Macroeconomic projections, 2019-2021. Close of projections 17 September 2019.

ankia Studies. Spain / State of the housing market. September 2019 https://www.bankiaestudios.com/recursos/doc/estudios/20191001/octubre/hipotecas-julio-19.pdf

· Hernández, Maria. Key points of the new mortgage legislation: changes and latest developments for customers. El Mundo, 17 June 2019: https://www.elmundo.es/economia/macroeconomia/2019/06/16/5d03c11121efa009498b460a.html

· INE [Spanish house price index]. Spanish National Accounts. Available at: https://www.ine.es/CDINEbase/consultar.do?mes=&operacion=Contabilidad+Nacional+Anual+de+Espa%F1a&id_oper=Ir&L=0

· INE. Anuario Estadístico de España. 2019 

· ITEC, Summary of the Euroconstruct report, June 2019 – Sumario informe Euroconstruct

· Lores, Félix. BBVA Research. State of the Construction Market in Spain. July 2019

· López-Rodríguez, David and María de los Llanos Matea. Bank of Spain General Department of Finance and Statistics. Economic bulletin. Recent developments in the housing rental market in Spain.

· Ministry of Industry, Trade and Tourism. Survey on the State of Industry. Construction Sector. Monthly Report. September 2019

· Ruiz, Alfonso Simón. The construction sector sees a demand for 100,000 new homes for rent per year. El País, Cinco Días. 7 October 2019 https://cincodias.elpais.com/cincodias/2019/10/05/companias/1570268158_600377.html