Fitch: Spain Faces Slow, Uneven Housing Market Recovery

Recent data suggests that Spain's protracted house price correction is coming to an end, in line with Fitch Ratings' forecasts. Improving credit supply will support the housing market, but weak fundamentals, particularly in some regions, mean the recovery will be slow.

The Spanish National Institute of Statistics' (INE) data showed that house prices rose by 1.8% yoy in 4Q14, the largest increase since the start of the housing crisis in 2009. INE estimates that Spanish house prices have fallen 37% from their peak, while property valuation company Tinsa gives a figure of 42%.

A turnaround in the Spanish housing market in 2014-2015, after nearly seven years of price declines representing a correction of 35%-40%, would be in line with our long-standing expectations.

We think the return of credit to the economy is one of the main causes of house price recovery. New mortgage lending at end-2014 was 33.8% higher than one year earlier according to INE.

We expect Spain's economy to continue recovering, with real GDP forecast to grow by 2.0% in 2015 and 2.3% in 2016. This will support mortgage performance. But fundamental conditions for the Spanish housing market remain weak. A combination of high unemployment (23.4%, with long-term unemployment a particular problem) and oversupply due to unsold new-builds from 2006-2007 will prevent a rapid rebound in prices.

Property sales increased by 19.6% last year according to the Spanish Notary Association, but at 366,000 the number of units sold was still less than half that registered in 2007. Fitch forecasts property sales to rise to over 400,000 units in 2015, eroding but not eliminating the country's large property overhang.

This will therefore be a two-speed recovery. Low turnover will continue in coastal regions and those on the outskirts of big cities with a large stock of unsold properties. Prices in those areas are likely to stagnate over the next year. In contrast, prime areas in the largest cities, such as Madrid and Barcelona, are likely to experience accelerating price growth.

Our most recent Spanish repossession analysis also highlights this regional variation, with forced-sale discounts higher in some coastal regions.

We do not expect a rapid rebound in prices nationwide, but a slow recovery, with nominal house prices almost flat in 2015 before starting to rise next year. Arrears will also decline, but slowly - we forecast a slight drop in three-months-plus arrears (excluding defaults) in RMBS transactions, to 1.7% in 2015 from 1.8% last year.