April 2005 news review

 Judging by the latest Government figures the Spanish property market appears to be gently cooling down, with annual property price inflation falling from 17.45% in the last quarter of 2004 to 15.7% in the 1st quarter of 2005.
Given the Spanish economy’s unhealthy dependence on the real estate sector for economic growth, Spain’s Prime Minister – José Luis Rodríguez Zapatero – though not presently on the best of terms with the Catholic Church, could be forgiven for saying a prayer or two in favour of this gentle descent to a much needed ‘soft landing’. Despite some worrying evidence of emerging problems in places like the Costa del Sol, where an increasing number of investors report that properties aren’t selling and prices are falling, overall it looks as if the Spanish property market has a reasonable chance of gliding down to a period of stability in which prices rise roughly in line with inflation.Unfortunately for misguided amateur investors who have speculated with off-plan properties in some of Spain’s hot spots like the Costa del Sol, the outlook doesn’t look so benign. In those coastal areas where the supply of property is surging against a background of cooling demand and environmental degradation, a more bone-shaking landing looks likely. Investors may have to re-learn the old lesson (forgotten every decade or so) that high promised returns always imply a high level of risk. Perhaps everyone should take note of the more contemporary lesson that estate agents in Spain don’t make good investment advisors. Off-plan speculators should stay at home but the coming months might be a great time for property buyers looking to snap up home in the sun at a discount.On another note I am delighted to announce that I shall be writing a monthly column for the Sunday Times Home Section on the subject of Spanish property. Every month a different issue related to buying and owning property in Spain.MARK STUCKLINThe final figures on 2004. How did the Spanish property market perform?

Average Spanish property prices increased by 17.45% in 2004 and the city of Valencia was Spain’s start performer with property prices increasing by 30.5%.

Annual Spanish property price inflation 15.7% in first quarter of 2005

The Spanish Ministry for Housing has announced that average Spanish property prices increased by 15.7% in the 1st quarter of 2005 compared to the same period in 2004. This represents a slight deceleration in property prices compared to the 17.4% registered in December 2004, and has been welcomed by the Spanish Government as a sign that a ‘soft landing’ is taking place in the Spanish property market. A full analysis of these latest quarterly results will be presented in Spanish Property Insight’s next news bulletin.

Resale property price up by 4.8% in Barcelona and 1.5% during 1st quarter 2005

Asking prices of resale properties rose by 4.8% in Barcelona and 1.5% in Madrid during the 1st quarter of 2005 according to Idealista.

Prices of holiday properties on the Costa del Sol fall during 2004

A study by the real estate consultancy Aguirre Newman, reported in the Spanish newspaper ‘ABC’, reveals that property prices in some areas of the Costa del Sol have fallen over the 12 months to the end of March 2005. The report finds that, against a background of intense urban development (25% of all new developments in Malaga have only been on sale for a year), average prices have fallen by 7.4% in the Marbella area, whilst the average price of detached properties has fallen by 3% compared to 2003.

The report finds that the average price for an apartment in Torremolinos, Fuengirola and Benalmadena ranges from 183,000 and 232,000 Euros, which average sizes of between 84 and 114 square meters. For Marbella, Estepona and Sotogrande average prices range from 404,400 to 509,000 Euros with average sizes of between 154 and 188 m2.

The report also finds that the average time it takes to sell property on the Costa del Sol has increased to between 22 and 24 months for apartments and 30 months for detached properties.

Metrovacesa Spanish property market and other economic forecasts 2005

Metrovacesa, one of Spain’s largest developers, has released forecasts for the Spanish real estate sector in 2005. The report envisages that the number of property transactions will increase to 950,000 from 868,000 in 2004 but that property price inflation will drop to between 5% and 15%, compared to 17.4% in 2004.

Spanish property market forecasts 2004 – 2005 by Metrovacesa
20042005 forecast
GDP REAL GROWTH
Spain2.7%2.7%
Euro Zone1.8%1.6%
OECD3.6%2.9%
EMPLOYMENT IN SPAIN
Increase in number of jobs362,400245,300
Unemployment rate10.5%10%
NEW HOUSEHOLD FORMATION244,800273,400
INTEREST RATES IN SPAIN
Nominal annual effective rate3.36%3.40%
Real interest rates0.16%0.40%
PROPERTY MARKET FIGURES
Housing starts687,100650,000
New properties completed556,000575,000
% growth in housing stock2.4%2.5%
Number of property appraisals868,000950,000
Property price increase17.4%5% – 15%

Spain has highest level of empty properties in the EU

According to a new report by the OECD Spain has the highest percentage of unoccupied properties in the EU, with 15.5% of all Spanish properties standing empty, compared to the EU average of 5%. This means that approximately 3 million of Spain’s overall housing stock of 21 million properties stand empty. Laws that protect renters over landlords coupled with extraordinary capital gains on Spanish property in recent years mean that many Spanish investors choose not to rent out their property investments.

70% of the Andalusian coastline will be built up within 5 years

According to an article published in Spain’s ‘La Razon’ newspaper, 70% of the Andalusian coastline, which includes the Costa de la Luz, the Costa del Sol, the Costa Tropical and the Costa de Almeria, will be built up within the next 5 years if steps aren’t taken now to limit development. It is estimated that 57% of the Andalusian coastline is already built up with residential developments, marinas and hotels, rising to 80% for Malaga province’s coastline, and according to Francisco Garrido – a local politician belong to the Greens – “90% of the Andalusian coastline already suffers from some level of environmental degradation”.

Malaga and Cadiz provinces responsible for 80% of planning infringements

80% of the 726 legal actions against illegal coastal developments initiated by the department of public works and transport during 2004 and 2005 were situated in the Andalusian provinces of Malaga (Costa del Sol) and Cadiz (Costa de la Luz). The so called ‘Coastal development police’ (policía urbanística del litoral), set up in 2001 to enforce the legality of urban development on Spain’s coasts, rejected 194 building permits granted by the town hall of Marbella. 77% of all proceedings against illegal development in the province of Malaga took place in Marbella alone. Andalusia’s Minister for Public Works – Concepción Gutíerrez – states that Marbella “is the only municipality that systematically grants illegal building licences and ignores injunctions”.

Brussels takes action on Valencian land-grab law

The European Commission has written to the Spanish Government stating that the now infamous urban development law in Valencia, often referred to as the “land grab” law, contravenes EU regulations. This law, known in Spain as the Ley Reguladora de la Actividad Urbanistica (LRAU) was introduced in the Valencian region to facilitate the process of urban development in areas that have always been zoned for development. The original law was poorly drafted in some key respects that allowed promoters to develop land against the wishes of local property owners, in some cases forcing owners to contribute to the development costs. The Government of the Valencian Region is now working on a revised law that will make it easier for local property owners to block development proposals that affect their properties. The original law, though undoubtedly poorly drafted, has been largely exaggerated and misreported in the British press.

Property price inflation in Spain 3rd highest in the world after Hong Kong and South Africa during final quarter of 2004.

According to a new article in The Economist, Spanish property price increases during the final quarter of 2004 were the 3rd highest in the world, at 17.2%, behind South Africa (29.6%) and Hong Kong (28.7%). Over the period 1997 – 2004 South Africa tops the rankings with property price inflation of 195%, followed by Ireland (179%), the United Kingdom (147%) and Spain (131%).

Property absorbs 50% of all private investment in Spain

A new study by the BBVA Foundation reveals that property absorbs 50% of all Spain’s private investment. Over the last 40 years Spaniards have tended to invest in private property over other alternatives but the trend has become more acute during the last 10 years. The report points out that “Property attracts a high percentage of overall investment, with potentially harmful consequences for future productivity”.

Bank of Spain warns of property bubble (again)

The Director of the Bank of Spain’s research department – José Luis Molina – has once again warned that excessive Spanish property prices, which the bank thinks could be overvalued by as much as 20%, represent a significant risk to the future health of the Spanish economy. Nevertheless Molina does not expect any abrupt down turn in the Spanish property market, which has been acting as the motor of Spanish economy in recent years. In his opinion a soft landing is the most likely outcome and recent statistics that point toward a gradual decline in the rate of Spanish property price growth seem to support this opinion.

Euribor falls to 2.268%, lowest level since May 2004

Euribor – the rate used to calculate mortgages in Spain – rose in March to 2.335%, but then fell back in April to 2.268%, the lowest level since May 2004.

Spanish hotels lose ground to holiday homes

The latest quarterly report on the Spanish hotel sector by the consultancy Irea reveals that, since 1999, Spanish hotels have lost 5% of market share to private properties. 8.9% of tourists now stay in their own properties and 7.7% choose to rent a private property, whilst the percentage of tourist staying in hotels has fallen to 65%. The report concludes that recent rises in Spanish property prices will slow the rate at which hotels have been losing market share.

Primary residencies gaining ground on the Catalan coast

A new study by Caixa Catalunya – one of Catalonia’s leading savings banks – reveals that primary residences have been gaining ground in Catalonia’s coastal regions at the expense of holiday homes. Between the years of 1991 and 2001 the number of primary residencies grew by 20.3% compared to 16% for second homes. This enhances the value of these areas as primary residencies attract a greater number of reliable buyers and contribute more to the quality of life in a region than do large concentrations of holiday homes that stand empty for most of the year.

Mayor of Torrevieja earns 5.2 million Euros in a property deal

The Mayor of the popular tourist destination Torrevieja (Alicante) – Pedro Hernández Mateo – has earned over 5.2 million Euros from a private property sale that has raised questions as to the legality of the operation and the potential abuse of power. The Mayor acquired 3 rural plots in July 2000 for 180,000 Euros and sold them 2 years later, in October 2002, for 5.4 million Euros.

Spanish mortgage lending powers ahead in January

Spanish mortgage lending in January increased by 23% compared to the same period in 2004, according to the National Statistics Office.

Mortgage payments to eat up 47.5% of Spanish household income in 2005

According to a new study by the Spanish developer Metrovacesa, mortgage repayments on a typical 20-year mortgage will eat up 47.5% of average Spanish household income in 2005 (up from 44.3% in 2004), the highest level for 12 years and significantly above the 33.3% normally recommended as manageable. The income burden for the average 25-year mortgage is expected to be 40.9%, up from 38.1% during 2004. The model used to arrive at these conclusions assumes that interest rates remain unchanged during 2005, that Spanish property prices rise by no more than 10% and that average Spanish salaries increase by 2.5%. Under these assumptions the average property in Spain will cost 8.69 years of average annual income, compared to 8.1 years in 2004.

The report reveals that the financial burden of mortgage repayments varies widely across Spain’s autonomous regions. The financial burden of mortgage repayments on the average 25-year mortgage is equal to or below the recommended level of 33.3% in 7 of Spain’s autonomous regions (Aragon, Asturias, Castilla-La Mancha, Castilla y Leon, Extremadura, Galicia and Rioja) and higher in the 10 other regions. The financial burden is highest of all in Madrid (53.7%) followed by The Balearics (46.6%) and The Basque Country (46%). For 20-year mortgages only 4 regions (Castilla-La Mancha, Castilla y Leon, Extremadura and Galicia) are capable of achieving the manageable financial burden level of 33.3%.

European Central Bank leaves interest rates at 2%

As expected by the financial markets the ECB has left Euro Zone interest rates unchanged at 2% in April. Anaemic growth in Germany and France means that interest rates remain too low for Spain, where economic growth and inflation are higher. Some experts suspect that the low cost of borrowing and excess liquidity is inflating an asset price bubble in Spain.

ECB hints that interest rates might have to rise to stave off an asset price bubble

In a recent monthly bulletin the European Central Bank has hinted that the increasing prices of assets such as property could mean that Euro Zone interest rates have to rise to stave off an assets price bubble, despite low economic growth and low inflation in key EU countries such as Germany and France. The bank has repeated its concern that excess liquidity (in part a function of the cheap cost of borrowing) is fuelling a property price bubble. According to a recent report by Morgan Stanley, property prices in Spain are overvalued by 30%.

Fears of an interest rate rise cause Spanish banks to offer mortgage insurance cover

Some of Spain’s leading banks such as Bankinter have started to promote insurance policies against a sudden rise in interest rates to their mortgage clients. With current Euro Zone interest rates at 2% it is almost inconceivable that mortgages in Spain will get any cheaper and any changes to Spanish mortgage interest rates in the future are almost certain to be increases. A rise in Euro Zone interest rates to 3%-4% would cause mortgage defaults to rise from their present historic lows. Mortgage insurance policies increase monthly payments in the short-term but protect mortgage clients from a sudden rise in payments over the longer-term.

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About Mark Stücklin

Mark Stücklin is a Barcelona-based property market analyst and consultant, and author of the 'Spanish Property Doctor' column in the Sunday Times (2005 - 2008). He can be reached by email on ms@spanishpropertyinsight.com.