Sharp adjustment needed

Almost three years after the deflation of the real estate bubble, fomented by the governments of the Popular Party (PP) and tolerated during the first Zapatero term, the housing market is still the great problem of the Spanish economy. The sale of houses, apartments and buildings is at a dead stop, the construction industry has accounted for the loss of more than a million jobs, and its input to growth remains negative. The dark panorama of construction has recently received new statistical confirmation. In 2010 there remained almost 700,000 new housing units up for sale, while the financial institutions, as a result of the collapse of the market, have on their hands a ¤65-billion stock of buildings and developable land which the market is unable to absorb.

No sooner had the first symptoms of the real estate crash begun to be perceived in Spain, than warnings were voiced that the only solution to the housing glut (in 10 years more than 5.5 million apartments were started, in an explosion of irrationality which assumed that market would absorb everything, and prices never fall) would be a rapid and profound adjustment of prices. The then-Deputy Prime Minister Pedro Solbes explained, with solid reasons, that the more quickly prices fell, the sooner the blockage would dissolve, and the sooner the construction industry could resume a level of activity capable of creating employment. This approach, moreover, calls for a certain political commitment so as not to favor the creation of a new bubble - for which reason it was decided to eliminate the tax rebates on housing purchases.

But the adjustment that has so far taken place has been neither rapid nor deep. Indeed, over the last two years it has been based simply on the cessation of building. The rate of absorption of finished housing units is so slow that the market may still take five years to recover. Prices have only fallen by an average of 16 percent when, given the huge unsold stock, it seems necessary to depress prices by about 40 percent. This is easier said than done. Private owners refuse to depreciate the value of their real estate assets, and the banks consider that a rapid drop in value would further deteriorate their balance sheets, even though their accounts make ample allowance for a percentage of foreclosures.

There are no incentives to bring prices down. All the less so, when it is observable that the most delicate aspect of the relation between the financial and the real estate markets is the risk inherent in those property development companies that are being sustained by banks and regional savings banks, simply so that their folding would not impose new and unsustainable burdens of foreclosed apartments on the financial institutions. Promoters and builders are calling for "imaginative formulas" to get the construction industry moving again. But the most efficacious solution is a drop in prices. And as for these "imaginative solutions," they must not include any public subsidy, direct or indirect.