Foros de la Plataforma por una Vivienda Digna

[billy]

Spain faces a macro risk-not just a construction sector risk

The current woes in the US housing market have also drawn attention to the situation in Spain. The reason for this is that is not hard to see: There are striking similarities between the two countries with respect to the development in both house prices and construction activity over recent years. The current problems in the US market for Residential Mortgage Backed Securities (RMBS) have also been mirrored - if to a lesser extent - in the market for Spanish Cédulas where spreads have widened since the start of this year. Furthermore stock prices - measured on a total return basis - also seem to be discounting some kind of underperformance of the Spanish economy to come: While Germany's DAX30 has risen by 20 % since the start of 2007 and EuroStoxx50 by 11 %, Spain's IBEX35 has gained a relatively meagre 6 %. The consensus of economic forecasters puts the economic outlook for Spain at a rate of real GDP growth at 3.8 % for 2007 and 3.0 % for 2008. That would be some deceleration but not a lot below the average rate of expansion by 3.4 % per annum for the 2001 to 2006 period.

As will be argued in this article, the case can well be made for a (much) more pronounced slowdown in Spain's economic activity. Our current forecast at Union Investment for real GDP growth in 2008 stands at a mere 2.2 %, i.e. clearly below consensus. This is not because we are pessimistic for growth either on a global scale or EMU in particular. In fact, we are quite upbeat for the European growth prospects with a forecast of 2.5 % for 2008 relative to 2.3 % in the consensus forecast. Where we beg to differ, is that we see a strong case to be made that Spain's economy is not just characterised by a sector risk in construction, but that the corporate sector is in insufficient shape to withstand an adjustment in that sector. That is quite in contrast to the US experience where healthy corporate balance sheets have provided a sufficient buffer to avoid a full-blown crisis stemming from the housing sector adjustment.
Let us now first take a look at the Spanish housing market which has shown a very remarkable boom: in 2006, 658,644 housing units were completed and construction of 760,169 housing units was started. To get this into proper comparison: in the 1990s the respective figures were 267.000 and 292.000 per year. So residential construction activity has more than doubled since then. Another comparison would be to compare the number of housing starts to the population, which stands at 40.4 million in Spain. So in 2006 housing starts where sufficient to provide 2 % of the population with new housing. If we take the corresponding figure for the US at the height of the recent construction boom (2.3 million housing starts) relative to a population of 300 million this would have been sufficient to provide 0.8 % of all Americans with new housing facilities. All told, the Spanish construction boom has been extraordinary both in comparison to past experience and relative to the US.
Residential construction accounted for 9.3 % of Spanish GDP in 2006. That is almost twice the average of G7 countries. Also, it is not only residential but also non-residential construction that has boomed. So almost 18 % of GDP are now construction related. As are over 50 % of total loans on the books of Spanish banks.

These figures, of course, only illustrate that there could be some problems down the road, if the boom of recent years were to reverse. But what can give the confidence that this is likely to happen at all or even in the near-term future?

The recent experience in the US suggests that there are three potential triggers for an adjustment in the housing market - all relative to the average rate of mortgage interest. Rental yields, i.e. the level of rents relative to the purchasing price of a home, individual wages and house prices themselves. The first two of which are already flashing negative signals and the last one coming into dangerous territory right now. Let us examine the triggers in turn:

If the rental yield is higher than the average rate of mortgage interest, the purchase of a home is economically sensible because owning is cheaper than renting over the longer term. Until the end of 2003 the Spanish market has seen a difference between the rental yield and mortgage rates of roughly two percentage points. From end-03 to end-05 the rental yield has been slowly but steadily eroded as the growth in rents did not keep up with the rise in home prices. Since early-06 the successive rate hikes by the ECB have driven up the mortgage rate from a low of 2.8 % to 4.4 %. Since November 2006 the rental yield is below the mortgage rate. Put simply: Renting is now economically more attractive than buying.

As for the second trigger, if the mortgage rate is below the rate of growth of individual income the ratio of personal debt relative to income is going to decline even if there were no amortisation of the underlying debt. Although nominal growth in aggregate wage income has been running at almost 7 % over recent years, most of this increase was driven by rising employment rather than individual wages. Since 2006 mortgage rates are once again above the growth rate of individual wages. Meaning that the servicing of mortgage debt will now mean more restraint if the ratio of debt to income is to be kept stable.

Last but not least, a rate of home price inflation above the prevailing mortgage rate means that the worth of the home is rising faster than the debt burden even if there is no debt servicing at all, i.e. if even interest costs are serviced by taking out new mortgage loans. This condition is still being met with home price inflation running at 5.8 % year-over-year and the average mortgage rate at 4.4 %. The difference is eroded fast, however, due to continued ECB rate hikes on the one hand and home price inflation cooling due to the other two indicators pointing in a negative direction on the other.

One question that is always raised in this context is, of course the impact foreign purchases play in that story. Indeed, there is a fairly high correlation between external buyers in the Spanish housing market and price appreciation. However, one has first to put the magnitude into context. At the very peak of external purchasing activity in early 2003, these transactions amounted to 0.9 % of Spanish GDP and have halved since then. Apart from that, foreigners will be driven by the same rationale as domestic buyers, i.e. affordability and economic pay-off. The chances that foreigners will come to the rescue in an environment in which is does not pay to own a home should not be regarded as high.
Next, there is the question of why Spain's ability to cope with a retrenchment in the housing market should be more limited than the one in the US. The answer to this is an entirely different situation in the corporate sector. Part of all our economic analysis at Union Investment is a stringent examination of flow-of-funds statistics especially with regard to the health of the nonfinancial corporate sector. The basic rationale here is that all income flows that have a direct nexus to production originate from this sector (the Ricardian assumption of the wage fund). Then we take a look at how much money flows back to the corporate sector via sales. The difference between the two measures is known as the savings or financing gap. The financing gap can be formally defined as retained earning plus depreciation minus investment spending. In normal times it is slightly negative as investments do not have to pay off in the period of their acquisition. If the savings gap of the corporate sector deteriorates, growth is normally accelerating. This is in line with Schumpeter's famous statement that the entrepreneur uses (credit financed) funds to make an advance contribution to economic growth. Economic booms are therefore associated with deteriorating financing gaps and rising leverage, while slumps are characterised by broad-based retrenchment and decreasing leverage in the nonfinancial corporate sector.

It is here where one can find the striking difference between the US and the Spanish macro developments during the housing boom: In 2000, the US financing gap of nonfinancial corporations stood at -3.5 % of GDP and gross debt at 97 % of GDP. Since then, the financing gap has narrowed to -0.2 % and gross debt was reduced to 79.4 % of GDP. The US corporate sector thus has no fundamental problem to withstand the shock of the housing slump and replace construction as a driver of economic activity. It is even quite surprising that the corporate sector on the far side of the Atlantic is still in such a good shape this far into the economic upswing. By contrast, the Spanish corporate sector exhibited a financing gap of -5.1 % of GDP in 2001 which has until 2006 deteriorated further to -8.1 %. Gross debt has risen from 66 % of GDP to 106 % of GDP over the same period.

The Spanish corporate sector seems, from our perspective, extremely close to a retrenchment itself - even if there were no problems in the housing market. If fact, there are only two other countries we evaluate on a regular basis that have ever come close seeing corporate financing gaps of the magnitude prevailing currently in Spain. One is Japan in 1990, the other is Portugal in 2000. The experience of corporate retrenchment in both cases in the following years has been anything close to pleasant.
With regard to Spain, there is now one open question and one piece of hope. The open question relates to the adjustment within a currency union. Central to a successful retrenchment in the corporate sector is the ability to increase sales and/or reduce costs, i.e. some other sector has to step in to fill the void. This could either be households, the state or the rest of the world. With Spanish private household finances also being stretched, only the government and the rest of the world can do the trick. The open question and the piece of hope both relate to the external sector. The good news for Spain is that the start of the adjustment might come at a time when the world economy is generally in good shape.

Japan had to do its bit at a time when world trade suffered from three consecutive shocks - the US recession of 1991, the breakdown of the European Monetary System of 1993 and the Asian crisis of 1997/98. Portugal had to start its adjustment in 2001 amid the turmoil of the bursting tech-bubble of 2001. While Japan is now out of the woods, Portugal continues to ail. Mostly because it has been unable to improve its price competitiveness vis-à-vis its European trading partners. This can be tracked to the continuation of high pay increases relative to productivity and other European countries.
It will remain to be seen whether Spain can pull off this trick faster than its western neighbour. But it seems a fair bet to envisage a significant slowdown relative to the recent past in Spain even if the general environment remains benign.

David Milleker is chief economist of Union Investment and regular guest contributor to Eurozone Watch.

http://www.euro-area.org/blog/?p=94
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40 propuestas por una Vivienda Digna

[Kiklikos]

Y que de todo esto aquí apenas se digan 4 cosas...

Yo creo que llevaba mucha razón un amigo mío que murió en febrero pasado, que cuando le decía que si se pensaban que éramos tontos él me respondía que es que realmente lo somos.