Spain: Improving financial conditions and housing market

Spain's improving financing and credit conditions will remain supportive of growth. SME funding and new credit to households continue to grow. Gross household loans rose 3.2% in April and SME loans (up to EUR1mn) grew above 10% y/y. The better lending dynamics in part reflect the improving asset quality of banks - the non performing loan ratio dropped to 11.4% in May from 12.5% at the end of 2014. Sovereign funding costs remain very low. 

The average interest rate on public debt issued by Treasury in 2015 is 0.9% - the lowest on record. More important, the very accommodative ECB monetary policy stance is expected to continue to support extraordinarily low financing costs for the private sector. The 12-month Euribor, the key rate for (almost) all Spanish mortgages, has averaged YTD 20bp (some 200bp lower than the 2012 peak-crisis level) and is unlikely to materially increase in 2015-16 as the liquidity surplus in the EA is expected to remain ample under the ECB's QE programme. 

Nearly all the relevant indicators are now signalling a recovery in the housing sector. House prices have now printed four consecutive quarters of positive growth (INE), following a peak-to-trough drop of 35% in average prices. Although the stock of unsold units will likely remain elevated (at more than 500k) for an extended period, real estate investment has turned positive (somewhat surprisingly) since end-2014, albeit from a low base.