IMF say end is near for Spanish house prices

 The International Monetary fund figures show that Spain may now be at the end of house price reductions.

The Spanish property market has always been of significant importance to overseas buyers where Spain remains an attractive option for retirement and relocation.  The International Monetary Fund statistics could mean that the downward spiral of house prices in Spain coming to an end.

The IMF January 2015 reports provides various reasons to suspect that the slump in prices is now nearing its end. These include an analysis of past crises suggests that devaluation tends to end between five and seven years after it begins.

Average household income and the cost of renting, house prices are now back to near normal levels in all four countries included in the study. In Spain each of these measures is now only around 10% higher than its historical average.

Tharman Shanmugaratnam, chair of the IMF’s policy steering body, calls for countries to move quickly to adopt structural reforms

Tharman notes that our real problem today is a lack of confidence in the medium to long term. “That lack of confidence inhibits today's activity and today's growth, “ he said. Structural reforms address this critical confidence gap, he says, citing Spain as an example where such reforms have shown beneficial results. Reforms require some “political courage,” he said, but it means “uplifting possibilities for people, and particularly, for the youth.”

Large house-price busts can leave countries facing wide output gaps, a highly indebted private sector, and weaker bank balance sheets. Addressing these problems simultaneously can be challenging, as efforts often involve trade-offs (e.g., faster deleveraging can widen output gaps). A careful and multi-pronged strategy is thus required to minimize trade-offs and accelerate sustainable recovery. Important progress has been made in this regard in all four countries. Priorities going forward vary across countries, reflecting their specific circumstances. 

Importantly The IMF expects that the Spanish economy to expand going forward, reflecting in part major reforms and measures already taken to address the crisis

It's not all good news

On the downside, there is no guarantee that real interest rates will stay at their current low levels indefinitely, and an eventual rise in interest rates to something closer to historical averages could lead to renewed drops in house prices. In Spain a large overhang of vacant houses—especially outside major urban areas is a negative factor in recovery

Spain was hit badly with over contruction

The European housing crisis was most severe in Ireland and Spain, where overbuilding during the boom led to larger house price declines, higher spikes in unemployment, and bigger drops in construction activity. These forces in turn prompted a larger rise in nonperforming loans in Ireland and Spain, especially on loans to construction companies.

A new way forward?

Last year in the Netherlands, the authorities introduced a temporary tax exemption for monetary gifts of up to €100,000 if the recipient used the proceeds to pay down debt on new or existing mortgages. More than 50,000 households signed up, with transfers totalling about 0.4 percent of GDP. This surge suggests that the measure could help ease liquidity constraints at limited near-term fiscal cost, given that the vast majority of transfers were unlikely to occur in the absence of the measure. Such measures might be appropriate for Spain, encouraging more transfers between cash-rich elderly and younger liquidity-constrained households.

author :  Nick Marr

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