The demand for new construction soars but there is hardly any supply: how it will affect prices

6 Jun | 11 min read

The relative demand anticipates that between 150,000 and 200,000 new homes are sought per year. Prices for new construction hit record highs while construction suffers the effects of the crisis.

The housing market is experiencing a critical moment in terms of the sale of homes. If in February we knew that the sale of homes reached a maximum since 2007 with more than 565,000 operations in 2021, almost 35% year-on-year more, which represents the largest upturn in the historical series, and so far, this year until March, the Figures have not dropped either, according to data from the National Institute of Statistics (INE).

Resale properties continues to dominate the market, with more than 450,000 operations, a figure for sales of used homes that has broken the record registered in 2007 (with 448,918 units). Meanwhile, new construction reached 20.3% of total sales in 2021, reaching almost 115,000 transactions, returning to levels not seen since 2014.

And the situation continues along the same path so far in 2022. In the first quarter of the year, more than 165,500 homes have already been sold, while in March alone more than 59,200 homes were registered, reaching total figures from the time of the real estate boom. Of these, almost 32,500 units were new homes between January and March, and in the third month of the year alone, 11,510 newly built homes were transacted, the second consecutive month in which more than 10,000 new-build units were sold. Since January 2021, the sale of new-build housing, almost all purchased off-plan, has not fallen below 8,500 units, practically testimonial figures in previous years and which have not been repeated regularly since 2014.

The supply of new construction will continue to be lower than what the demand asks for.

Despite these outstanding numbers, data shows that the current housing supply does not satisfy all the demand that is looking for a new home, especially towards new construction. While the sales of used houses exceed the levels of 2007, that of new construction is still 65% below operations in the face of the real estate boom.

With the relative demand data, which analyses the pressure of demand on supply, it is calculated for each area as the number of contacts received among the total number of existing ads in a period of time, we find that by 2022 greater pressure is expected from the demand that is looking for houses on the supply of homes advertised in the real estate marketplace in southern Europe, a figure that would oscillate in a demand of around 150,000-200,000 units of new construction per year.

Some calculations that slightly exceed the data provided by the Association of Builders Promoters of Spain (APCEspaña), which estimates that between 120,000 and 150,000 new units per year are needed until 2030 to cover the structural demand of the market.

However, the construction sector is currently at somewhat lower levels in terms of the granting of new construction permits, which are those that anticipate the construction of homes. Last year it closed with 108,318 homes with the new construction management visa, according to statistics from the Ministry of Transport, Mobility and Urban Agenda (Mitma). It is a figure that maintains the ascending line seen before the outbreak of the pandemic, and that has not been seen since 2009.

The promoters themselves have already warned that the current economic environment of uncertainty will cause visas to fall compared to the previous year. “The works started before the crisis will be finished, but 43% of the promotions that were still pending the granting of the new construction license will wait for the economic environment to improve”, the president of ACPSpain and Asprima recently highlighted. , Juan Antonio Gómez-Pintado. “Costs related to energy are the ones that are most affecting the sector. Products such as steel, aluminium, copper, zinc or cement are the materials that have the greatest impact due to the intensive energy consumption they require”.

Lland transactions should moderate in 2022, and the fact is that the sharp increase in construction costs will lead the main developers to exercise extreme caution in land purchases with the aim of protecting their margins in the future”, and they estimate that the balance between supply and demand will remain at around 100,000 units per year, with improvements in the coming years.

And it is like the entity’s own study department and the International Financial Analysts (AFI) anticipate a brake on sales and housing prices as early as 2022 due to the impact of the economic slowdown and the escalation of inflation.

From AFI they comment that “newly built housing permits will stagnate at around 110,000 units per year during 2022 and 2023” and highlight that “the increase in the costs of various construction materials, together with the difficulty of covering vacancies in the sector that could lead to an increase in labour costs, reinforce this forecast for the residential supply in the short term.

How the current environment of uncertainty will affect new home prices
If the forecasts for house prices by some analysts at the end of 2022 speak of a slowdown in increases, between 1% and 4%, it has yet to be noticed in the current market, which perhaps has not yet reflected the impact of the invasion of Ukraine at the end of February, and which is already affecting the rise in prices and the deterioration in financing conditions, such as the more than expected rise in the Euribor, and in the economy of families.

For now, new construction is experiencing its particular boom in prices, according to the latest Euroval report. According to their appraisals, the absolute average price is already 33.3% higher than in the real estate boom, to place a new national record average price of 255,428 euros.

The Property Registrars also stated in their latest Real Estate Registry Statistics corresponding to the first quarter that the prices of new housing reached a new maximum in the quarterly historical series with 2,025 euros/m2.

But the registrars warn that a certain drop in the level of activity would be normal and considering that trading levels above 480,000 units have assumed active market scenarios. In the short and medium term, it will be difficult to place annual amounts below these levels”.
The inflationary processes may be leading to strengthen the favourable background dynamics that the market has been counting on, to the extent that they may consider housing as a refuge value with respect to said scenario”, the registrars have highlighted, and it is something that new construction experts have also stated.

“The sustained growth in demand and the upward trend in prices have made newly built homes one of the most profitable options in the real estate market,” they specify.

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