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  As from the start of the economic recession, the savings rate of Spanish households was extremely volatile. Between 2007 and 2009, it rose by almost seven percentage points to 18% of the disposable income of families, going above that of other traditionally more savings-oriented countries such as Germany and Belgium. The improved economic outlook has subsequently reduced this rate to 14%. These sharp changes have characterized the profile of Spanish economic development over the last few years and will be key to determining its capacity to recover. It's therefore important to understand what lies behind this greater volatility in the savings rate of Spanish households.

  It's no surprise that, when the economy shrinks, uncertainty regarding future expectations damages the confidence of the different institutional sectors. In the case of households, this falling optimism usually leads to a rise in their rate of savings in order to prepare for future contingencies. As shown by the graph below, the behaviour of most European households when the recent crisis erupted followed this pattern. Except for some exceptions such as Austria and Italy, between 2007 and 2009 the household savings rate rose in the main countries of the European Union (EU). During this period, only Irish households recorded a higher rise in the savings rate than their Spanish peers. We can also see that it was in Spain where households recorded the biggest slump in savings during the subsequent months, once confidence began to recover.

  This different sensitivity of household savings throughout the economic cycle may be in response to different factors. It's logical that the rise in the household savings rate should be particularly marked in those countries where the recession has had a greater impact on the economy of families. This is shown by the first graph on the next page. The biggest increases in the savings rate occurred where the drop in employment was greatest. It's also logical that, as the situation of households stabilizes, the savings rate will get back to normal.

  But in addition to these reasons related to the economic situation, there may also be other fundamental factors behind this greater volatility in Spanish savings. In this respect, the Household Financial Survey (EFF in Spanish), produced every three years by the Bank of Spain to gather itemized information on the structure of Spanish families' assets and debts, points to some possible reasons. Among the data gathered by this survey, of note is the composition of Spanish households' assets, clearly biased towards real assets (such as property, their own business, works of art, jewellery, etc.). In the first quarter of 2009, these accounted for 89.1% of the total assets, with financial assets making up the remaining 10.9%.(1) This major concentration on real assets, which has remained practically constant over the last few years, focuses fundamentally on investment in property. Specifically, 80% of households' total assets are property, a figure that falls to 60% if we only take primary residences into account. The smaller weight of real assets recorded in similar surveys in the United States, Italy or the United Kingdom, accounting for less than 70% of total assets, highlights the greater propensity of Spanish households to accumulate real estate.(2)

  This composition of the Spanish households' wealth may well be crucial for both the level and the development of their savings rate. On the one hand, greater investment in property has reduced savings in financial assets and has therefore placed the average savings rate for Spain at a relatively low level, specifically 11.3% between 2000 and 2007. This figure is lower than the average for the main European countries, such as France, Germany and Italy, with 15.4%, 16.0% and 15.6% respectively in the same period. In other words, as they have a real asset, Spanish households believe it's less necessary to save part of their income.

  On the other hand, this significant proportion of investment in property means that the wealth of Spanish households is highly concentrated in illiquid assets, as these cannot be converted quickly into cash without significant loss of value. This lower liquidity is no drawback during a boom, when the need for liquidity is unlikely to increase suddenly. In fact, the dynamism of real estate markets during years of strong growth and the possibility of using real assets as collateral for credit operations meant that liquidity could be obtained without incurring too high cost. This contributed to reducing the savings rate during the expansionary period. However, during the last recession, the distribution Spanish households' wealth affected their savings. Falling house prices led to a reduction in families' wealth, so they restricted their consumption. Moreover, within this context, it was more difficult to sell property quickly. Consequently, part of the sharp rise in households' financial savings could be explained by the high concentration of wealth in property.

  A simple way to verify this relationship is to observe whether the volatility of savings is proportional to the percentage of property owned by households. Although this hypothesis cannot be confirmed directly due to the lack of data measuring the composition of households' asset portfolio at a European level, we can use the percentage of households that own their residence as an approximation. As can be seen in the graph below, those countries with a higher proportion of households that own their residence were, on average, the ones recording the highest rise in their savings between 2007 and 2009.

  (1) For more details, see: «Encuesta Financiera de las Familias (EFF) 2008: métodos, resultados y cambios desde 2005», Boletín Económico del Banco de España. 01/2011.

  (2) O. Bover, et al., «The wealth of Spanish households: A microeconomic comparison with the United States, Italy and the United Kingdom», Boletín Económico del Banco de España 07/2005.

  Cultural factors undoubtedly play a very important role in the composition of Spanish households' wealth. The importance of acquiring a home in Spain is reflected in the high proportion of households that own a residence, reaching 83% and only exceeded by Norway. Even the 78% of Spanish households with lower incomes own their residence, a figure that's higher than the average of all EU households, standing at 73.5% in 2009. But this cultural bias towards owning housing does not have to be at odds with economic rationality. Unlike the main European economies and the US, the gross return on Spanish property over the last twenty years exceeded that of bonds and equity, with annualized growth rates of 7.5%, 7.3% and 6.9% respectively. A figure that would rise to 11.4% if we took the period 1970-2010 as our reference.

  Although the recent fall in house prices might make investment in property seem less attractive at the moment, in the long term the returns should become positive again and we can therefore expect the composition of households' wealth not to vary too much. This means that it will continue to be a decisive factor in the evolution of the savings rate of Spanish households. A rate that will go on falling in the short term if the Spanish economy and consumer confidence continue to recover at the same pace returning, thus, to levels similar to its average of the last few years.

  This box was prepared by Joan Daniel Pina

  European Unit, Research Department, "la Caixa"

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