Efficiency in housing production
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Real Estate Watch
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5. Efficiency in housing production
Ignacio San Martin
bbva economic research department
Introduction
In the four years since the last census, conducted in 2001, the start of a total of 2.8 million new houses has been projected in Spain, which is an annual average growth rate of 2.7% in the total number of houses. This is a much higher rate than in the eighties (1.9%) and nineties (2.3%) and more in line with the rates observed in the sixties and seventies, which were periods of intense building as large numbers of people migrated from the countryside to the cities.
In 2005, a total of nearly 790,000 new houses were endorsed, which is equivalent to production of over 17 houses for every 1,000 inhabitants. This volume is only surpassed by Ireland today and equalled by Finland and Greece at the beginning of the nineties. This high volume of production has meant that residential investment already accounts for nearly 9% of Spain's GDP.
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In this environment, Spanish developers have capitalized on the strong increase in residential demand to boost their finances, increase their size and extend their territorial scope. Thus, the volume of leading developers' revenues has trebled in the last four years and their capitalization has increased by 230% during the period.
One of the next steps for Spanish developers is international expansion. Here, several questions are posed in the sector: Are Spanish companies more efficient than their competitors in an environment other than Spain? Will they know how to exploit their competitive advantages? Will they obtain similar returns to what they obtain in Spain?
Theoretical aspects
a) Inefficiencies in the real estate market
From the conventional standpoint, both the land and housing markets tend to be viewed as relatively inefficient markets, due to:
• the existence of externalities in planning and construction,
• the presence of public assets in the market or
• the difficulties in obtaining true complete information, which leads to relatively inefficient allocation of resources1.
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In general, from the academic standpoint, there is a need for: a) a large number of buyers, b) a large number of sellers, c) relatively standard products and d) full information for a market to function efficiently. In the housing market as a whole, the products are very diverse, especially if the characteristics of location are taken into account. Even if the products are stratified so that there are different
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