Rebalancing in Spain’s private sector is under way, but with more modest progress on reducing stocks. Spain is subject to significant spending pressures, reflecting unfavorable demographic trends and subdued growth prospects, and will require substantial structural reform. Priority reforms are needed to strengthen its fiscal framework. The study tries to infer the potential impact of the ongoing integration process on bank efficiency based on preconsolidation bank data. The reforms, such as those recently implemented, of employment protection and collective bargaining could help improve Spain’s inflation performance.

Abstract

Rebalancing in Spain’s private sector is under way, but with more modest progress on reducing stocks. Spain is subject to significant spending pressures, reflecting unfavorable demographic trends and subdued growth prospects, and will require substantial structural reform. Priority reforms are needed to strengthen its fiscal framework. The study tries to infer the potential impact of the ongoing integration process on bank efficiency based on preconsolidation bank data. The reforms, such as those recently implemented, of employment protection and collective bargaining could help improve Spain’s inflation performance.

I. How Much Has Spain’s Private Sector Rebalanced? Exiting from a credit and housing boom1

Rebalancing is underway, with flows adjusting significantly, but with more modest progress on reducing stocks. The weight of construction and real estate in GDP, employment, and new lending has largely adjusted from previous excessive levels, but will likely remain weak as overhangs (including of housing prices and unsold units) persist. Private sector debt levels have stabilized at high levels - how much they have to fall is unclear, but it could be significant and long lasting.

A. Introduction

1. The Spanish economy has built several imbalances that markets have identified as potential vulnerabilities (fiscal deficits/debt, external deficit/debt, high household and corporate debt/ borrowing, the oversize construction sector, low private savings). These are being unwound. Until they have fully done so, the economy will face headwinds. But what exactly were the imbalances, how much have they unwound, how much further have they to go, and how much longer will this take?

2. Rebalancing is a concept in search of a theory. There is limited literature on rebalancing per se. There is an ongoing discussion on rebalancing at the global level, for example within the G20, but the country level discussion of rebalancing is incipient.2 Still, if rebalancing is sometimes hard to define (what does it cover? what is the balance we are looking for? have economies ever been balanced?), imbalances are slightly easier to identify.

3. The paper focuses on two major private sector internal imbalances: (i) the excessive weight of construction and real estate, and (ii) the excessive leverage in the economy. In the case of Spain, three imbalances are commonly identified, including by Spanish authorities: (i) excessive weight of residential real estate in GDP, (ii) rapid expansion of credit and leverage in the private sector, and (iii) current account deficits. This paper deliberately leaves out adjustment in the public sector (which can be seen as a response to the initial private sector imbalances) and the external aspects of adjustment (which can be seen as the flipside of private domestic imbalances).

B. Spain’s Boom and Private Sector Imbalances: a Legacy of Stocks

4. The boom has left Spain with relatively high household and particularly corporate debt compared to the euro area. Though the initial level of corporate debt was already high in Spain (albeit below the euro area average in 1999), it now largely exceeds most EU countries, with the exception of Ireland. Spain’s household debt to income ratio has also significantly diverged from the average of the euro area since 2001. The UK, the Netherlands, Denmark, Sweden and Portugal have all higher household debt to income ratios than in Spain.3

Figure 1.
Figure 1.

Corporate and Household Debt

(Percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

Sources: Eurostat; National Central Banks; and IMF staff estimates.

5. Housing and leverage have been moving in tandem. This is reflected both in the increased lending to construction and real estate activities and in the strong co-movement of housing prices and credit (Figure 2). Gimeno and Martinez-Carrascal (2006) show that house prices and mortgages in Spain are interdependent in the long run: loans for house purchases depend positively on house prices, while house prices adjust when this credit aggregate departs from the level implied by its long run determinants. In the short run, the two variables have a positive contemporaneous impact on each other, indicating the existence of mutually reinforcing cycles in both variables.4

Figure 2.
Figure 2.

Spain: Credit Growth and Housing Prices

(year-on-year percent change)

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

Sources: Banco de Espana; and Tinsa.

6. The increase in corporate sector indebtedness has been driven in large part by the housing boom. During the boom years of 2004-2008, construction explained 8 percent of private sector credit growth, real estate activities (largely real estate development) 22 percent, and the acquisition of real estate (mortgages) 33 percent.5 Real estate activities have contributed disproportionately to the increase in corporate credit, much more than construction itself, which seems less out of line (Figure 3). The outcome is that as a result of the boom, construction and real estate sector debt owed to Spanish banks represent a relatively high 10 and 30 percent of GDP respectively. The boom also dragged down the economy’s productivity (Box 1).

Figure 3.
Figure 3.

Spain: Credit to the Real Estate and Construction Sectors

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

Sources: Banco de Espana; and IMF staff estimates.

The Low Return of the Housing Boom

The housing boom was a poor investment for Spain and dragged productivity down. The average contribution of residential investment to GDP growth in the boom years was high (0.5 percent and one sixth of GDP growth). Spain differs from other countries with significant house price appreciation (e.g. the UK) in that it has seen not only a house price boom but a construction boom as well. This has mobilized significant resources, in capital and especially labor. Besides leaving a legacy of stocks (housing units, unemployment and debt) the payoff in terms of productivity and total factor productivity has been low. And because it does not increase export capacity but still requires construction inputs that are imported in part, it had also a direct effect - albeit small - on the trade balance.

While the housing boom had a negative effect, productivity has been lagging in other sectors as well. Total factor productivity growth in Spain has been low across sectors, and this cannot be explained only by the increasing weight of construction. Less than half of the difference in productivity levels with the rest of euro area can be attributed to a different sectoral composition of the economy (FEDEA, 2010). Thus lowering the weight of construction will have some immediate payoff in terms of labor productivity growth but will likely not be sufficient to bridge Spain’s aggregate total factor productivity gap with the euro area in the medium run.

A01ufig02

Total factor productivity growth in industry

(percent)

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

Source: European Commission.
A01ufig03

Contribution of construction to labor productivity growth

(percent)

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

7. The construction and real estate sectors are large, highly leveraged and rely more on bank financing than in other countries. Traditionally, construction and real estate are activities more leveraged than other sectors. In Spain, this stands out clearly for large companies listed on the stock market, though this also reflects the financial profile of large companies that have expanded abroad and in activities that range beyond their original specialization (Figure 4). More broadly, not only the sector is more leveraged than other sectors, but the Spanish construction sector is also more leveraged than its peers (Figure 5). The construction sector in Spain also tends to rely more on bank debt than in other countries (Figure 6).6 This would explain in part the high exposure of the Spanish banking system to these sectors.

Figure 4.
Figure 4.

Spain: Financial Ratios by Sectors, Listed Companies

(percent)

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

Source: Comision Nacional del Mercado de Valores (CNMV).
Figure 5.
Figure 5.

Corporate Sector: Selected Financial Ratios

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

Source: IMF Corporate Sector Vulnerability Utility.
Figure 6.
Figure 6.

Bank Debt by Sector of Activity

(percent)

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

Source: BACH-ESD Database.

8. The construction and real estate sectors apart, leverage in the corporate sector is similar to euro area countries with higher income levels. This is true on average for Spain, while some sectors (like hotels and restaurants) appear more leveraged. This suggests that the relatively high level of corporate indebtedness prevalent in Spain will not necessarily go away only with the scaling down of construction and real estate activities. Excluding construction and real estate activities, corporate debt could be estimated as representing the equivalent of 143 percent of GDP, still higher than the euro area average.7

9. The boom also leaves a legacy of concentrated debt burdens across households. Household debt in Spain is largely concentrated in mortgages (80 percent) and the share of households with mortgages in Spain is similar to France and Germany (ECB, 2009). Still, those households who have debt tend to be more leveraged. Another country with high home ownership, Italy, has also the lowest percentage of households with mortgages in the euro area and low leverage, about half that of Spain.8. Beyond these aggregate differences, Spain’s median household debt to income ratio is significantly higher in poorer (as measured by wealth) and younger households.9 The prevalence of debt is also proportionately more important in households that are not employed. Despite a high proportion of the young living with their parents and a high youth unemployment rate, it is also noteworthy that the prevalence of mortgages and the median debt to income ratio among the young (less than 35) is higher in Spain than in the US (which overall has a similar median debt to income ratio but a higher prevalence of debt).

Table 1.

Selected Countries: Household Debt

article image
Sources: Banco de Espana; Banca d’Italia; and US Federal Reserve.

Data for Italy are more than 65.

10. The capacity to bear these debt burdens has been supported by the high levels of wealth in Spain, albeit largely concentrated in real estate. The main mitigating factor to the high household debt is the particularly high level of household wealth in Spain (estimated at six times GDP), and mainly concentrated in real estate - 87 percent of their household wealth vs. an average of 60 percent in the euro area (Figure 7). This reflects a high homeownership ratio (82.3 percent), a significant degree of ownership of secondary houses, and overall a strong preference for housing as a saving instrument. The high home ownership ratio also implies that a given ratio of debt service to income is less of a burden in Spain as households pay less in rent.

Figure 7.
Figure 7.

Spain: Household Wealth

(percent of GDP)

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

Source: Banco de Espana.

C. To What Extent Have Imbalances Unwound So Far?

11. Flows have significantly adjusted, much in line with other recent experiences of countries with housing booms and busts. The nominal decline of lending flows, construction activity and employment is sharp and largely in line with the experience of other countries with housing booms and busts (Table 2). The large employment in construction (as well as the weight of construction in GDP/investment) has adjusted substantially, explaining a large part of the increase in unemployment (Figure 8). Construction employment -at 8.5 percent of total employment - has adjusted substantially from its peak (13.1 percent). It is lower than the Spanish average over the last 30 years (9.9 percent) but still higher than at the trough experienced in the mid-80s (7.3 percent in 1985). Employment in construction tends to be structurally higher in Spain than in the rest of Europe and the question going forward is whether construction employment will “undershoot” and for how long (Figure 9). For the time being, the large decline in construction employment has helped foster an improvement in productivity and - together with some wage moderation - an improvement in unit labor costs.10

Table 2.

Selected Flows and Stocks Adjusment from Peak

(percent)

article image
Sources: Banco de Espana; Eurostat; National authorities; and IMF staff estimates.
Figure 8.
Figure 8.

Employment in Construction

(percent)

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

Source: Eurostat.
Figure 9.
Figure 9.

Spain: long term trends in the share of construction employment

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

12. Household and corporate saving ratios saving have also temporarily and rapidly adjusted to deal with stretched balance sheets. However, this large adjustment seems to have been temporary, in particular for household saving (Figure 10). Households’ gross saving rate had for many years been below the euro area average until the second half of 2008, when it jumped sharply to above the euro area average. However, in early 2010, the ratio fell sharply back to below the euro area average (though still a bit higher than during the boom years and than in other countries with high household debt levels such as the US, UK, Netherlands), possibly as household disposable income started to fall significantly. The increase and subsequent decline of the household saving ratio has been the sharpest across Euro area countries.11 This modest improvement has helped stabilize, but not decrease the stock of household liabilities.

Figure 10.
Figure 10.

Spain: Evolution of Household Saving, Financial Assets and Liabilities

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

Sources: INE; and Banco de Espana.

13. The house price adjustment seems about two-thirds completed. Judging by official house price indexes, prices have fallen less in Spain than in Ireland and the US, though similar to the UK (which had less expansion in its housing stock and construction activities).12 The adjustment seems about two-thirds completed compared to estimates of the initial degree of overshooting, with a 20 percent decline in real terms, close to the average of housing busts in the euro area (ECB, 2009), but likely still with more to go in nominal terms (Table 3).13 Other price indices suggest prices have fallen further, but still have more to go. Affordability indicators have improved, notably as mortgage rates went down, but not enough to stimulate demand. Nonetheless, the more recent pick up in mortgage rates and the end of the mortgage interest deduction from income tax as of January 1, 2011 - a measure correctly aimed at addressing distortions in the housing market—will also affect affordability for new mortgages (Figure 11).14

Table 3.

Estimates of Real House Price Overvaluation for Spain

(percent)

article image
Figure 11.
Figure 11.

Selected Affordability Indicators

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

Sources: Banco de Espana; Halifax; National Association of Realtors; and US Census Bureau.

14. The stock of unsold units may take around another four years to clear. The lowest estimates of the stock of unsold units are at close to 700 000 units, with considerable regional variations but with a downward adjustment that has only started at the end of 2010. These only include newly completed units, and do not fully include units repossessed by financial institutions, unsold secondary market houses, or unfinished units.15 Long run sustainable demand estimated by IMF (2009) and updated in light of revised demographic projections, points to a sustainable demand of about 300 000 units/year (Figure 12).16 In light of this and current housing starts and completions, it would take about four years to clear the inventory (e.g. taking into account the fact that for technical reasons the housing inventory cannot go down to zero).

Figure 12.
Figure 12.

Spain: Housing Inventory and Estimates of Demand for Housing

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

Sources: Spanish Housing Ministry; Catalunya Caixa; and IMF staff estimates.

15. The adjustment of credit stocks has barely begun. It is normal for the stock of mortgages to take a long time to adjust, given the maturity structure of the loan portfolio. Credit to construction has adjusted significantly, as it has done in the previous comparable recession episode in Spain (1993-1994). But there has been relatively little adjustment in the large stock of loans to real estate activities (Figure 13). The stock net of provisions has adjusted significantly but it remains that the gross stock has declined modestly. Despite a lower average maturity, it has adjusted in line with the mortgage portfolio, and much less than in other countries (Table 2). Not all loans are directed to property development, but this could suggest that a part of loans to developers (in particular) is being renegotiated to help them cope with the deep downturn in the sector.

Figure 13.
Figure 13.

Spain: Adjustment of Credit to Real Estate and Construction

(year-on-year percent change)

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

16. How much further the credit deleveraging has to go is inherently uncertain and depends on whether the comparison is with Spanish trends or other countries.

  • Based on Spanish history, credit per capita is now below trend. Using the same methodology as in Mendoza and Terrones (2008) to identify credit booms, an Hodrick-Prescott identifies deviations from the Spanish trend of real credit per capita between 1962 (first data point available) and 2010 (Figure 14). There is a clear deviation from trend starting in 2004 and a previous boom and bust episode at the beginning of the 1990s is also correctly identified. According to this measure, the credit boom in Spain has been unwound.

Figure 14.
Figure 14.

Spain: Identification of credit booms

Hodrick-Prescott Filter (lambda=100)

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

  • Compared to cross-country estimates, however, credit levels may have significantly further to unwind. Cross country comparison can only provide a very rough guide as to what is the appropriate level of debt in a single country. However, unwinding to levels of peer countries would be challenging in a low growth environment. As an illustrative scenario, at the current rate of nominal credit growth (year on year declines of ½ percent for household debt and 1 ½ percent for corporate debt), and based on the IMF WEO forecasts for nominal GDP, household, but not corporate, debt would significantly converge to the current averages for the euro area in 2016 (Figure 15).17 Achieving convergence for both households and corporate over this timeframe implies annual average nominal credit growth of around -2 percent for household debt, but -17 percent for corporate debt. In other words, unless credit contracts for the next 5 years, private debt ratios will still likely be higher in Spain than in its euro area peers.

Figure 15.
Figure 15.

Spain: Evolution of Household and Corporate Total Debt at Current Rates of Adjustment

(percent of GDP)

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

Source: IMF staff estimates.
  • Spain seems to have diverged from cross country levels of credit determined by fundamentals. Panel estimates of the relationship between private credit and a set of economic fundamentals (GDP per capita, credit to the government, inflation, interest rates, intermediation spreads), on a sample of 22 advanced economies, suggest relationships in line with similar studies (e.g. European Commission (2010)), with strong positive effects from GDP per capita, negative effects from inflation (on the development of intermediation, rather than through the impact on real interest rates and demand for credit) and credit to the government (Table 4). They also point to high country fixed effects coefficients for Spain and suggest a level of credit which may have been deviating from fundamentals for long periods of time, perhaps explained by other Spain specific factors, such as a high rate of home ownership and preference for home tenure.

Table 4.

Cross country estimates of private sector credit and relationship with fundamentals

article image
Fixed Effects Least Square; 22 advanced economies; quarterly data (1980-2010). All variables in log.

significant at 1%

significant at 5%

significant at 10%.

Figure 16.
Figure 16.

Private Sector Credit

(Percent of GDP, logarithms)

Citation: IMF Staff Country Reports 2011, 216; 10.5089/9781462340545.002.A001

17. Evidence from the literature on cross-country experiences with deleveraging after crisis episodes also point to a potentially long rebalancing in Spain. The growing literature on deleveraging after crisis episodes shows that deleveraging can take a long time, on average 6-7 years, starting two years after a crisis (e.g. Reinhart and Reinhart, 2010; Tang and Upper, 2010; McKinsey, 2010). The literature has focused on evidence from the aftermath of banking crises, unfortunately much less so on housing booms per se (which makes it less applicable to the case of Spain). The general experience is that deleveraging is due in equal parts to a fall in nominal credit, GDP growth and inflation.18 Often (e.g. Finland in the 1990s) the deleveraging has been led by a sharp increase in net exports, stimulated by an exchange rate devaluation. Although a devaluation was experienced in 1993, this option is no longer open to Spain, and to significantly deleverage options are few going forward (a decrease in nominal debt and/or an increase in nominal GDP).

D. Conclusions and Policy Implications

Spain’s long period of economic expansion relied on a double boom that produced two large and interlinked private sector imbalances:

  • Excessive weight of construction and real estate (in GDP, employment and lending). These flows have largely adjusted, but are likely to remain at weak levels for some years as overhangs (for example of unsold units) are unwound.

  • Excessive debt levels. These have stabilized but have not fallen. Household savings rates initially jumped with the crisis, but have since fallen back (though household investment has remained lower). Credit to the construction sector is falling significantly, but not credit to the real estate sector. How much further credit has to unwind is unclear and an equilibrium level of credit is difficult to estimate. But judging by cross-country comparisons, credit to the private sector, and in particular to the corporate sector may have further to fall, which could mean years of negative credit growth in the absence of a sustained expansion in output.

Though it is largely a market driven process and macroeconomic policies will play a critical role, more specific policy options could also help, in particular:

  • Ensuring the ongoing financial sector reform promptly delivers the needed “cleansing”, especially in fully recognizing losses in the real estate sector. Avoiding a situation of “zombie lending” (to real estate activities) and delayed adjustment as in Japan (Caballero et al, 2008) should be a priority. More so than reaching a given level of credit, it is important that a reallocation of credit can take place towards the more productive and innovative sectors of the economy. This might require more decisive action to resolve unviable real estate developers and shrink the size of sector.

  • Continuing the reform of the housing market with the primary purpose of allowing the market to clear, either through enhanced price discovery (for example through greater use of tools like multiple listing systems), or through greater development of the rental market (currently a third of the euro area average).

References

  • Banco de Espana (2011): « Informe Anual », June.

  • Banco de Espana (2010a): “Encuesta financiera de las familias (EFF) 2008: Metodos, resultados y cambios desde 2005 », Boletin Economico, December.

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  • Banco de Espana (2010b): « La situacion actual de la inversion residencial en Espana », Boletin Economico, December.

  • Banca d’Italia (2010): Survey of household finance and wealth.

  • Caballero, Ricardo J., Takeo Hoshi, and Anil K. Kashyap. 2008. “Zombie Lending and Depressed Restructuring in Japan.” American Economic Review, 98(5): 194377

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  • European Central Bank (2009): “Housing finance in the Euro area”, Task Force of the Monetary Policy Committee of the European System of Central Banks, Occasional Paper 101, March 2009.

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  • European Commission (2010): « Cross country study: Economic policy challenges in the Baltics “, European Economy Occasional Paper No. 58.

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  • FEDEA (2010): “Un agenda de crecimiento para Espana” http://www.crisis09.es/agenda/20101201_Agenda.pdf.

  • Gimeno, R. and Martinez-Carrrascal, C. (2006): “The interaction between house prices and loans for house purchase. The Spanish Case”, Banco De Espana Working Paper No.0605.

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  • IMF (2009): “Developments in the Spanish Housing Sector”, Selected Issues, IMF cr/09129.

  • Mendoza, Enrique G. and Terrones, Marco E. (2008): “An anatomy of credit booms: Evidence from macro aggregates and micro data” IMF Working paper No.08/226.

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  • McKinsey (2010): “Debt and deleveraging: the global credit bubble and its economic consequences”, January.

  • Nabar, M. and Syed, M. (2011): ‘The Great Rebalancing Act: Can Investment Be a Lever in Asia?”, IMF Working Paper No. 11/35.

  • Reinhart, C.M. and Reinhart, V. R. (2010): “After the Fall”, NBER Working Paper No. 16334, September.

  • Tang, G. and Upper, C. (2010): “Debt reduction after crises”, BIS Quarterly Review, September.

  • Tokuoka, K. (2010): “Rebalancing in Japan: The Role of Private Consumption”, IMF Working Paper No.10/293.

1

Prepared by Jerome Vacher.

2

Recent country specific attempts include Tokuoka (2010) for Japan and Nabar and Syed (2011) for Asia. These focus on ways to increase private consumption (Japan) or investment (Asia).

3

For the Netherlands and Denmark, specific features of the mortgage market (a higher prevalence of mortgages, combined with different amortization profiles of mortgages) are likely a major factor. In the Netherlands for instance, the high level of mortgage debt is explained by the prevalence of interest only and contractual savings mortgages which delayed redemption of the principal and fiscal deductibility of mortgage interest payments.

4

The average maturity of mortgages in Spain has increased substantially during that period, from 12 years in 1990, to 22 years in 2000, and 28 years at the peak of 2007.

5

Hence construction and real estate activities explain more than half of the increase in bank lending to the corporate sector during the boom years.

6

In the BACH database some real estate developers are included in the construction sector.

7

Since the breakdown of corporate debt by sector other than debt owed to banks is not available, we assume a share of non bank debt of 56 percent for construction and 29 percent for real estate activities (based on BACH data).

8

The data comes from household finance surveys prepared by the Spanish and Italian central banks. Central banks and statistical offices of the euro area are engaged in an effort to coordinate and harmonize household finance surveys under the leadership of the ECB (http://www.ecb.int/home/html/researcher hfcn.en.html). Few surveys are published, and the level of dissemination is among the highest in Spain and Italy.

9

In Spain the share of households in the two lowest income deciles owning their primary residences increased from 70.6 percent to 78.1 percent between 2005 and 2009 (Banco de Espana, 2010a). Debt service has increased by 1.8 percentage point during that period, but more so for the young (3.9 percentage points).

10

Though the rise in Spanish unemployment is broader than a construction story, the decline in construction employment explains around 40 percent of the increase in unemployment since 2008.

11

Some of the high volatility of the Spanish household saving rate has been attributed to the large share of wealth held by Spanish households in real estate. The fact that real estate assets can be fairly illiquid in a downturn could lead to sharp increases in the saving rate.

12

For the US, there are also significant regional differences, with much sharper declines in states in where the expansion of the housing stock has been substantial (Florida, Nevada, and California in particular).

13

ECB (2009) estimates the average adjustment during housing busts in the euro area at 18 percent in real terms and 37 percent in nominal terms. The adjustment in real terms three years after the peak is also comparable to the decline registered during the previous housing crisis in Spain at the beginning of the 1990s (Banco de Espana, 2010b), though the current cycle is more inventory driven and does not beneficiate from a rapid decline of real interest rates as experienced in the second half of the 1990s. The Bank of Spain expects a decline of 25 percent in real terms from peak to trough in 2012 (Banco de Espana, 2011).

14

95 percent of Spanish mortgages are at variable rates, and adjust in line with the Euribor12 months. Mortgage interest deductibility has been capped at a low level, starting January 2011. The mortgage interest deduction prevalent until January 2011 included a tax credit of 15 percent of the principal and interest and capped at €9000. The mortgage interest deduction is now only applicable to households with less than €24 000 in income. The house price-to-rent ratio remains higher than in other countries. Rents (on new rentals) have adjusted downwards with declines from peak of between 10 and 26 percent in the three largest cities (Madrid, Barcelona and Valencia).

15

Units repossessed by financial institutions are estimated at between 100 and 200 000 units.

16

The estimates are notably based on demographic projections, rates of household formation and estimates of secondary houses (for more details see IMF 2008). These have been updated, notably in light of a downward revision of population forecasts, as published by the Spanish National Statistics Office (population forecasts up to 2020). Downward revisions to population growth are largely explained by a decline in immigration flows.

17

Weighted average data for 8 Euro area countries with longstanding and highly developed financial systems (France, Italy, Germany, Austria, Belgium, Netherlands, Luxembourg, Finland). Euro area program countries (Greece, Portugal, Ireland) were excluded from the sample.

18

The average adjustment after 17 systemic banking crises was of 38 percentage points of GDP (Tang and Upper, 2010).

Spain: Selected Issues
Author: International Monetary Fund