Where Have Spain's Builders Gone?

As I was wading through all the statistics and recent property market research before writing my annual reports on the Spanish Property Market I was struck by how the damage caused by the financial meltdown of 2008 is still impacting the market nearly two decades later. That global event led to the collapse of Spain's property market, the banking crisis and the almost complete destruction of the construction industry.

Anyone involved in Spain’s property market in prime locations in both the overseas and domestic sectors has had one major complaint in recent years, that is the lack of supply of quality properties in the very best locations. This lack of supply at a time of significantly increased demand has inevitably pushed prices higher.? As I showed in my recent reports the average price paid per square metre by overseas buyers has risen substantially in the Mediterranean hotspots which account for 70% of all foreign buyers in Spain in a typical year. Comparing 2019, the last full-year before the Covid-19 pandemic arrived, with 2024 we see a rise of 44.3% in the Balearics, 36.7% in Andalucía, 30.5% in the Comunidad Valenciana and 21.5% in Catalu?a.?

However, it seems unlikely that the supply/demand imbalance will improve any time soon. Recent research by BBVA, CaixaBank, the Bank of Spain, CBRE, developers and constructors and other interested parties has highlighted just how bad the imbalance is. And it all started with massive over supply during the speculative building frenzy leading up to the 2008 crash. For several years Spain built 600,000 - 800,000 units a year, more than Germany, France and the UK combined. The highest number of building licences approved in one year was for 865,560 units in 2006.?

However, many of these units were of average quality and in places where nobody wanted to live. In the domestic sector satellite suburbs appeared on the outskirts of many towns and cities without the infrastructure needed; no rail or bus connections, no schools, medical facilities, supermarkets and shops. They quickly became ghost towns for those unlucky enough to have bought off-plan. In the overseas sector, apartment blocks of average quality in high density areas attracted few buyers. When the inevitable crash came it was estimated there was an overhang of 1.6m unsold properties. Some analysts believed a significant proportion of unsold new housing stock would never find a buyer and indeed, some were demolished.?

Spanish banks were drowning in toxic assets and came close to collapse. Slow to react, the ‘bad bank’ SAREB was not established until 2013 into which banks transferred the junk. Spain secured a €100 billion credit line from the European Central Bank of which they drew down €60+ billion which has now been repaid.? But the end result of this situation was the almost total destruction of the Spanish construction sector.? When interest did start to return, most notably from overseas buyers from 2012, building licence approvals had fallen to 34,870 in 2013, representing a fall of 96% when compared to the high in 2006. The 21,000 approvals just in Málaga province at the peak of the boom had fallen to just 715 in 2014, a decline of 96.5%. And the decline from that peak of 865,000 in 2006 to 90,000 today shows the construction industry is still about 90% smaller nearly two decades later.

And the reason I believe the situation is not about to improve in any meaningful way is that, according to recent research and reports, Spain is currently only completing about 90,000 new units annually, some 40% below what is needed to cover new household formation, running at approximately 235,000 per year. In October 2024, the Bank of Spain estimated that Spain is lacking 600,000 units to satisfy new household formation since 2021, the year it believes the demand/supply ratio became seriously uncoupled. And this doesn’t take account of demand for second homes, from both domestic and international buyers, plus the rental investment sector. Even worse, between 2025 and 2028 new households are predicted to rise to 330,000, back to roughly was it was at the time of the 2008 crash.

Such limited supply of new-build properties inevitably puts pressure on prices in the resale sector and so they are going in one direction only - up.? Given the figures I quoted previously, it seems that international buyers, the big spenders in the Spanish property market, are very willing to absorb these rises to get the right property in their chosen location. And I seriously doubt that demand and supply will reach a balance for several more years given issues confronting the construction sector which include higher construction costs and a serious lack of qualified employees. I see rising prices for the foreseeable future.

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