Just Returned from Madrid, a Tale of Two Housing Markets

Spain was not immune to the worldwide Great Recession. Similar to the United States Spain’s real estate was also affected with banks lending sans oversight and subsequent defaults. When I was in Barcelona two years ago there were signs of a real estate market in recovery coupled with in-migration of younger entrepreneurs attracted to the city with its affordable housing and commercial space.

Visiting Madrid this past weekend I was impressed with the vibrancy of the housing market. Of note Madrid is enjoying its most robust year of home construction since 2008 with an average of 2,151 new residential licenses awarded per month in the first 7 months of the year. City-centric real estate seems to have strong demand from flats to even garage parking where a space cost can rival the cost of condos in the suburbs of Denver. Even in the northern Madrid suburbs development continues with demand fueled by affordability when compared to the center of the city.

Yet just beyond the major cities the carnage resulting from The Great Recession is still visible. According to a local broker and statistician the real estate sector’s recovery in Spain is developing at two clearly different speeds. While one part of the country is consolidating the recovery of the sector and even expanding, another part of the country is stagnating and is showing few signs of returning to pre-crisis levels in the medium- and long-term.

The major cities and tourism centric areas are booming fuelled by interest rates that are still near historic lows, an economic recovery, demand from other European residents and a banking system that has been stabilized. Like in the United States private equity firms including Blackstone Group LP ($25B Euros invested in Spain) is purchasing once-toxic assets and similar to their MO in the United States is converting properties into rentals as home ownership has yet to rebound in Spain which once had a quite high rate of home-ownership.

Yet beyond the city centers and tourism hot spots the market is struggling. Travel to the outskirts of smaller villages and ghost towns still litter the landscape – once ambitious developments, often started on agricultural land that was converted into building lots just before the Great Recession started.

An example and known by some urban planners like myself is the unfinished Bioclimatic designed development known as City La Encina. Situated on the edge of the village of Bernuy de Porreros, about 6 miles from Segovia, it promised to be Spain’s first environmentally-friendly town, providing solar energy and recycled water for 267 homes, two-, three-, and four-bedroom chalets and apartments. At present only about a dozen of the homes are occupied.

Related and what statisticans like myself look at is the mortgage market as an excellent indicator of the status of the overall real estate market. The volume of residential mortgages sold in Spain peaked in late 2005 before hitting a low in 2013. In the 5 years since the bottom the mortgage market has gradually recovered with 28,755 sold in August 2018, a 7% annual increase. The recovery of Spain’s real-estate is truly uneven and reinforces the oldest axiom of real estate it’s about Location, Location, Location.