Household formation and the need for new primary dwellings in the medium term

Following the severe and protracted shake-out of the Spanish residential property market that began in 2008, the latest data indicate that the market is now starting to stabilise. Specifically, since end-2014, both housing purchases and housing starts have begun to show a slight recovery, fuelled by the general improvement in economic activity, the labour market impetus and more favourable financing conditions. Nevertheless, calibrating the strength of the recovery is no easy task. The depth of the housing crisis drove activity down to extremely low levels, so there may be a certain rebound effect in the initial recovery stages. In addition, household debt levels remain high, as does the unemployment rate (especially among persons of an age to form a household), and there is a plentiful stock of unsold property, all of which could limit sector recovery in the short term. In order to analyse the outlook for the residential property market, it is useful to draw a distinction between potential and actual housing demand: potential demand is essentially linked to demographic factors, while actual demand relies on more conjunctural factors such as credit availability, youth unemployment or the user cost of housing capital. This article aims to examine the role played by demographics in potential demand for primary dwellings, which is the component that may be estimated most directly from demographic projections. For this purpose, the household projections of the Spanish National Statistics Institute (INE) at provincial level for the period 2015-2029 are used; these assume that both the flow of immigrants and the household formation rate in 2014 will continue in future. Using this baseline scenario, several alternatives are formulated assuming, in comparison with the INE’s figures, a slightly higher inflow of immigrants and a smaller household size, and in consequence higher potential demand for primary dwellings. The estimates deriving from potential demand for primary dwellings could be an appropriate indicator of trend developments in new building needs in the absence of market imbalances. However, one of the legacies of the residential property market crisis is the sizeable stock of unsold housing, which means that potential demand may be met by new building, but also, initially, by sales of existing housing. Moreover, the amount of housing stock varies from one province to another and this, together with the low rate of interprovincial mobility of the Spanish population, suggests that an analysis of the housing market must include a regional dimension. Thus, to determine new housing needs at a national level, in this article estimated net household formation is aggregated province by province after deducting a certain level of unsold housing stock. The article is structured as follows: first the methodology used is described, and then the population projections are presented, outlining the different household formation scenarios for the period 2015-2029;3 lastly, alternative paths for housing stock absorption are considered to obtain an estimate of future new building needs.