The residential investment adjustment in Spain: the current situation

Residential investment played a key role in the long expansion of the Spanish economy for more than a decade to 2007 and in the crisis it has undergone in recent years. This variable is of great importance for analysis of the cycle, in booms and busts alike, for several reasons: its spillover effects on various productive branches; its impact on the prices of the main asset making up household wealth; and its influence on the shape of household and corporate financial flows, given the high level of leverage residential construction entails. This article aims to review the current situation of the housing investment adjustment in Spain, following the sharp turnaround seen in recent years in real estate activity and prices. To do this if first examines the role residential investment has played in output since the start of the last expansion, from the standpoint of both supply and demand, and the main channels of transmission through which it affects other productive branches and also agents’ spending decisions. Next, a more detailed analysis follows of the trajectory of the housing investment adjustment since 2007, and recent developments in real estate prices are set out. Finally, a general assessment is made of the state of the adjustment and of the outlook for this investment component. While this process has undoubted effects on financing flows in the economy and on financial stability, these matters will remain outside the scope of analysis of this article.