If you are familiar with these bulletins will know that I take a bearish view of certain segments of the Spanish property market. I expect choppy waters in those areas where there is a high level of both new-build and amateur off-plan speculation, though of course I could be wrong. I also think that a down turn, if it happens, will be temporary as in the medium to long-term I see Spain as the destination of choice for millions of Northern Europeans looking for a better quality of life. But I’m not the only voice in town. In this bulletin’s 2004 review and forecasts for 2005 I summarise the opinions of several leading Spanish commentators on the property market. Whilst they all expect price increases to moderate they also expect 2005 to be another year of respectable growth. So it seems that in comparison to the consensus I am on the lunatic fringe. Let’s hope the consensus forecast is right.
During January several organisations have announced their conclusions on the performance of the Spanish property market in 2004 and forecasts for 2005. Here I summarise and compare them.
In November of last year the Spanish Housing Ministry (Ministerio de Vivienda) released official figures showing that price increases over 12 months to the end of the 3rd quarter amounted to 17,8% on an average national basis. Figures for the whole of 2004 are not yet available but as readers of last month’s bulletin will know I have already voiced scepticism as to the accuracy of official government figures on this question.
During January Antonia Trujillo – the minister for housing – spoke of a possible moderation in the growth of property prices saying, “It is true that there are figures that point towards this change”. She declined to venture any firm predictions for 2005 but did use the opportunity to take a swipe at the housing policy of the previous Government which she described as a failure (the gist of the previous governments policy was radical liberalisation of land classification rules, freeing up more land for building. It basically took the attitude that any land that wasn’t part of a nature reserve was fair game for building on. Unsurprisingly the volume of building land in Spain has risen by 25% over the previous 20 years whilst building land in the rest of the EU has shrunk by 20% over the same period).
According to the Spanish Cadastre (the Cadastre is a local government property registry used for tax and assessment purposes) the average price of property in Spain rose by 11% in 2004. Commenting on this figure the Director of the Cadastre – Jesús Mirana – said that it represents a slow down on previous years and a signifies a trend that he expects to continue over the next few years.
In an exquisite understatement he also commented that on occasions the officials at the Cadastre have noticed that, for some sales, the official transaction price recorded in the deeds is significantly below the cadastral value, implying that some transactions involve a cash element undeclared in the deeds (known in Spain as B-money). The reality, though difficult to quantify, is that many, probably a majority, of resale property transactions in Spain involve a certain amount of B-money that enables the parties involved to evade taxes.
Meanwhile the Council of Spanish Notaries (Consejo General del Notariado) has announced that average Spanish property prices increased by 19% over 11 months to November 2004, with almost all of this increase taking place in the first 6 months of the year. According to figures from the Council of Notaries 703,683 properties were sold over this period last year in Spain, 550,000 of them purchased with mortgage financing. 90% of the mortgages were fixed-interest with an effective annual rate that dropped from 3,57% in January to 3.45% in November. The average duration of mortgages increased from 287 months (24 years) to 306 months (more than 25 years).
CB RICHARD ELLIS – REAL ESTATE CONSULTANTS
CB Richard Ellis – a real estate consultancy – released a report based on a survey of 200 real estate executives showing that the majority of them expect Spanish property prices to increase by 5% to 10% in 2005, lower than in previous years, and that the number of housing starts will fall to 500,000, down from well over 600,000 in 2004.
BBVA – ONE OF SPAIN’S LARGEST BANKS
In its latest report on the Spanish real estate market, BBVA (one of Spain’s biggest banks) has forecast that the rate of Spanish property increases will slow down to 10% in 2005 and 5% in 2006, from around 17% in 2004. Note that 17% in 2004 is a moot point as it does depend upon whose figures you use: the Housing Ministry’s (around 17%), the official appraisal companies’ (various, but Sociedad de Tasación claims 14%), the Notaries’ (19%) or the Cadastre’s (11%).
The bank does not believe that this slow down will have a significant impact on the construction sector nor the Spanish economy. The bank expects that promoters will adjust fairly painlessly to lower demand by reducing the number of properties they build.
The bank goes on to state that “the increase in the number of new and second-hand properties for sale coupled with a modest drop in demand will reduce the rate of sales in new developments to below 4 units sold per month”.
BBVA expects that a property market slowdown will be more marked in those areas where foreigners tend to buy – basically the better know Spanish coasts such as the Costa Del Sol and the Costa Blanca. The report notes that the average time-to-sell in these areas is getting longer and predicts that demand from foreign buyers will decline modestly in the future, though not immediately. Anyone working in the business of selling property to foreigners would contest this claim, as demand from foreign buyers appears to be clearly down compared to previous years. However the report does point out that foreign demand for Spanish property has doubled in 3 years.
Regarding new housing starts the bank forecasts that overall housing starts will fall to 600,000 in 2005, with sharper falls in the coastal areas where foreigners tend to buy.
METROVACESA – A LARGE DEVELOPER
The research department of Metrovacesa, one of Spain’s biggest real estate companies, has published its yearly report on the Spanish real estate sector in which it says that “all the evidence suggests that property price increases will slow down more in 2005 than they did in 2004″· The report claims that the Spanish real estate sectors has grown for 7 consecutive years with average property prices increasing by 144% over this period. By region the biggest price increases over this period were as follows: Balearics (215%), Murcia (209%), Madrid (168%), Andalusia (162%). In contrast the lowest property price increase were Galicia (83%), Castilla y Leon (83%) and Extremadura (86%).
Metrovacesa concludes that the slowdown will be gradual, that foreign demand for Spanish property will not grow any further and new housing starts will decrease to 550,000 in 2005, down from 660,000 in 2004.
|Comparison of positions|
|Housing Ministry||17.8% 12 months to end of Q3||No forecast|
|Notaries||19% January – November 2004||No forecast|
|CB Richard Ellis||–||5% to 10%|
|BBVA||14%||10% (5% in 2006)|
|Sociedad de Tasación||14% (new build)||Slowdown|
|Metrovacesa||17%||7% to 15%|
SPANISH PROPERTY INSIGHT CONCLUSIONS
Spanish property price inflation has undoubtedly been strong in recent years though accurate figures don’t exist to show us exactly how strong. Most of the Spanish organisations that report on the Spanish real estate market are predicting that prices will continue growing in 2005 and beyond but at a slower, more sustainable rate. On the other hand organisations outside of Spain such as The Economist Magazine, The European Central Bank, The IMF and The OECD, have all voiced serious concern about the price of property in Spain, implying that a sharp fall in prices is a distinct possibility, and in the case of The Economist the most likely outcome.
My advice to anyone considering buying property in Spain in 2005 would be as follows. If you are buying as an owner-occupier with a long-term approach (even if you only plan to use the property for holidays) and you have the finances to buy without taking excessive risks, then go ahead and buy. Over the medium to long-term Spanish property should be a sound investment as well as a property to use and enjoy.
However if you are an amateur investor hoping to earn a fast buck investing in off-plan Spanish property then I advise you to tread very carefully indeed. Don’t commit unless you have the time and resources to carry out thorough research and treat the claims of sales agents with great scepticism, including claims as to how easy it will be to rent out the property. And very importantly don’t invest unless you have the funds to withstand a worst-case scenario in the short to medium term.
According to the latest report from Idealista, resale property prices rose by 18.3% in Barcelona and 7.5% in Madrid during 2004. At the end of 2004 the average asking price per square metre for resale property in Barcelona was 3,905 Euros compared to 3,787 Euros in Madrid. This is the first time in 4 years that resale property prices have risen by less than 10% in Madrid (2001: 26.2%, 2002: 28.7%, 2003: 17.3) and property prices actually fell in 7 of the Spanish capital’s districts during 2004. Barcelona has now overtaken Madrid as Spain’s most expensive city in which to buy resale property.
Idealista’s figures are based on asking prices rather than transaction prices but do offer a reasonable proxy for the market.
According to the latest figures from Spain’s National Statistics Office (INE) rental prices rose on average by 4.1% in 2004. With inflation of around 3.2% this means that real rental prices increased by 1% in the year.
The largest increases in rents were as follows: Extremadura (5.8%), Madrid (5.1%), Andalusia (4.7%), The Balearics (4.6%), Catalonia (4.4%), Murcia (4.3%) and Navarre (4.2%).
Regions with rental increases below the national average were as follows: Aragon (4%), Galicia (3.7%), Autonomous Region of Valencia (3.6%), The Basque Country (3.4%), Castilla y León, Castilla-La Mancha and Asturias (2,7%), Cantabria (2,2%), La Rioja (1,9%) The Canaries (1,7%).
Given that Spanish property prices almost certainly increased by over 10% during 2004, 6% above rents, it’s clear to see that rental yields are heading South.
According to the Spanish daily El Mundo the Spanish stock market has outperformed Spanish property for the second year running. Whilst Spanish property values increased on average by 12.5% (a figure obtained from one of Spain’s leading appraisal companies based on property prices in provincial capitals) the IBEX 35 – Spain’s leading stock Index – increased by 17.4%. This despite the fact that in Spain property (bricks) is generally viewed as a better investment than shares (paper).
Since 1988 gross returns on both types of asset have been broadly similar. Whilst Spanish property has increased in value by a factor of 3.35, rising from 682 Euros/m2 to 2,286 Euros/m2, the IBEX 35 has increased by a factor of 3.32, from 2,272 points to 9,080 points.
The article quotes Rupert Lea of the real estate consultancy Cushman & Wakefield Healey & Baker as saying that Spanish small investors continue to prefer property despite similar gross returns from shares: “Investment returns in property are safer and profits are higher” he says. This, it should be said, is a moot point.
The article goes on to explain that Spanish property has not experienced the kinds of shocks know to affect the stock market, pointing out that whilst stocks increased by 54.2% in 1993 they declined by 28.1% in 2002. Declines in property prices over the same period were modest by comparison (-1.5% in 1992 and -0.2% in 1993). Lea is also quoted as saying: “Investors in property are more conservative than investors in the stock market. They are more risk-averse and tend to be people taking refuge in property after bad experiences in the stock market”. However he also says that the Spanish property market needs greater transparency to arrive at a more accurate picture of property values.
The Spanish financial daily ‘Cinco Días’ reports that Spanish property buyers and sellers under-declare the transaction price in the public deeds by around 20%. According to Ignacio Navas – national coordinator of a body that monitors the property market on behalf of the General Council of Notaries (Observatorio de la Vivienda / Consejo General del Notariado) and the firm of solicitors Garrigues – “people under-declare the price paid in the deeds for fiscal reasons”. This claim, though correct, is bound to irritate the Spanish real estate sector.
Ignacio Navas goes on to say that “there are no reliable statistics for the property market in Spain. The figures provide by the appraisal companies can’t be trusted because these companies overstate property prices to justify larger mortgages not only for buying houses but also to finance general consumption”. Spanish Property Insight made precisely this point in its December 2004 news bulletin.
Euribor – the base rate used in Spain to calculate mortgage repayments fell in December to 2.298%, down from 2.328% in November 2004. Mortgage interest rates remain near their historical low in Spain and the real cost of money, after adjusting for inflation, remains close to zero or negative. Good news for anyone with a variable-rate mortgage in Spain. However experts expect Euribor to rise during 2005, though not to an extent that will cause financial distress for Spanish families, according to the Association of Spanish Mortgage Lenders (AHE).
According to new figures from the National Institute of Statistics, Spanish mortgage lending rose to 16 billion Euros in October 2004, 18.7% more than the same period in 2003. The value of the average mortgage granted in October was 123,975 Euros, an 18.4% rise on October 2003. Over the course of October 128,940 Spanish mortgages were granted, a small increase (0,28%) on the year before but 8,75% less than in September 2004.
On the other side of town the Spanish Mortgage Association (AHE) has announced that mortgage lending increased by 24.5% for the whole of 2004, the largest annual increase since 1996. The Association expects mortgage-lending growth to drop to 17% in 2005.
According to Maria Antonia Trujillo – The Spanish Minister for Housing – there are around 1 million unoccupied properties in Spain, a fact that makes housing expensive by limiting supply. She has presented her ideas for making housing more affordable through stimulating the rental market with a government rental agency and tax deductions for renters. She expects her housing plans to be approved by March or April and have the public rental agency operative in the 1st quarter of this year. Her objectives are to make housing more accessible to poorer sections of society such as young couples and to reduce the rate of property inflation to sustainable levels over the long term.
Plans announced by the Minister for Housing – María Antonia Trujillo – to make housing more affordable met with general derision from Spanish business leaders (El Círculo de Empresarios). Her ideas include a state-run rental agency to ensure that more property is available for rent, which the club believes will just increase bureaucracy and waste. Claudio Boada, the Club’s President says, “it’s unnecessary and will create distortions in asset allocation which the market does more efficiently”. The Club believes that the only way to make housing more affordable in Spain is to tackle the shortage of land (with building permits) and encourage landlords to rent out their properties by increasing their legal protections.
© Mark Stucklin (Spanish Property Insight)