News this month that Spain is building almost as many properties per year as France, Germany and the UK combined (see below), despite having a considerably smaller population and economy than any of one of these countries. The figures show that construction in Spain has reached orgiastic proportions, as anyone driving around Spain’s coastal regions can see for themselves. Frankly, it’s all a bit depressing. Too much is being built too quickly with too little attention to what it will all look like at the end, and how it will all fit together. I only hope that this investor-led building frenzy ends soon, leaving the business to developers who care more about quality and the environment, and who build homes for people to use. Spain is a stunningly attractive country, but I have to admit that over the past few years they haven’t done a very good job with the concrete.

MARK STUCKLIN

IN DEPTH

2nd quarter 2005 property market review
There is still no real sign of a slowdown in the Spanish property market, at least as far as the official figures provided by the Spanish government are concerned.

SPANISH PROPERTY MARKET NEWS

Foreign investment in Spanish property down 17.2% in 2005
According to new figures from the Bank of Spain, non-residents invested 400 million Euros in Spanish property in March, down from 509 million during the same period in 2004 – a drop of over 21%.

The Bank’s figures show that foreign investment in Spanish property peaked in 2003, when foreigners invested 7 billion Euros in Spanish property. In 2004 the amount invested dropped by close to 7%, and in the 1st half of 2005 the downward trend has accelerated, with foreigners spending 17.2% less on Spanish property than in the same period last year. This contrasts with the period between 1999 and 2003, when foreign investment in Spanish property grew by 130%. The Bank’s figures reveal that foreigners are spending less on Spanish property than before, despite the fact that Spanish property prices rose by over 17% in 2004. High prices and over-development, coupled with worries about the health of the UK economy, are likely drivers of this trend.

Stagnating Spanish property prices from 2006 to 2010 – new forecast
An annual report jointly published by Forcadell – a real estate company – and the University of Barcelona, forecasts that Spanish property inflation will fall from an annualised rate of 15% in the first half of the year to 8% by the end of the year, and then drift into a 4 year period of stagnating prices lasting until 2010. The report identifies the causes of the expected property sector slow-down as a lower demand for properties (especially investments), an increasing supply of properties, and a growing stock of unsold properties.

Meanwhile a new report on the Spanish real estate sector by Bayes Forecast finds that only interest rates of 7% can put a stop to increasing Spanish property prices, assuming no other external shock to the economy. Nevertheless this study also forecasts a slowdown in price increases to around 5% or 6% from 2006 onwards, slightly above the expected rate of Spanish inflation (and therefore a very limited level of real property price increases).

Also during September Caixa Catalunya – one of Spain’s biggest savings banks, and a regular author of forecasts on the property market – has forecast in its half-year report on the Spanish economy that prices of newly built Spanish property will increase by 16.2% in 2005, on a par with the average for 2003 and 2004, and slightly down on the 16.8% clocked up in the boom year of 2002. Caixa Catalunya expects 708,000 housing starts in 2005, beating even the all time record of 687,000 started in 2004, and much more than the 490,000 odd properties started each year on since the mid-1990s. The report suggests that the present level of building activity will cause imbalances that will have to be faced at some time in the future. The report also expects the growth in mortgage lending to fall from 21% in 2004 to 18.7% in 2005. In conclusion the report expects Spanish real estate prices to continue increasing robustly in the short term, whilst stating that such growth will be “difficult to maintain for more than a few years”.

Standard & Poor’s warns of risk of Spanish property crash
After the boom in European real estate markets over the past decade, a coming orderly slowdown in house price inflation in the region is forecast by Standard & Poor’s Ratings Services, in a report published on Sept. 13, 2005. Spain is most vulnerable to a hard landing in house prices, but even in this market a gradual retreat is the most likely scenario.

The article, entitled, “Can Europe’s Housing Markets Break Out of the Boom-Bust Cycle?”, is part of a special Standard & Poor’s report in CreditWeek, which asked seven senior Standard & Poor’s analysts to look at the global housing bubble, focusing on conditions in the U.S., Europe, and Asia from a range of perspectives, including homeowners, builders, lenders, investors, and mortgage insurers. Each author was asked to consider how a sharp home price decline could affect a particular sector of the economy. A teleconference to discuss Standard & Poor’s outlook is scheduled for Monday, September 19, 2005 @ 10:00 AM EDT. All seven Standard & Poor’s analysts will be available to the media. Dial-in information is below.

Historically, EU markets have experienced a combination of short and long house price cycles, characterized by periods of sharp growth and declines in real house prices. These periods of boom and bust feature uninterrupted changes of at least 10% per annum in real house prices, of which there have been 18 country-specific booms and 10 busts since 1980. One-half of the housing booms and busts in the past 25 years have been concentrated in just four countries: the U.K., Sweden, Finland, and Denmark. In the four years since the stock market “bubble” burst in 2001, however, housing booms have been more widely spread across the EU.

“With only a few exceptions, EU markets have experienced a period of very strong house price inflation in the past decade that is more widely spread than in previous cycles,” said Jean-Michel Six, Standard & Poor’s Chief Economist for Europe. “This boom has been driven by a combination of structural factors, namely demographics, interest rates, and easier access to bank loans, all of which led to a dramatic expansion in the EU mortgage market in the past 10 years.”

Standard & Poor’s sees a moderate slowdown in European housing markets–including the U.K. and France–as the most probable scenario. “Nevertheless, double-digit house price inflation cannot be sustained indefinitely and there are legitimate reasons to fear that the boom may turn into a crash,” said Mr. Six.

In particular, the real estate market in Spain raises concerns, as the massive property boom of the past five years appears far from having run its course. At the end of the second quarter of 2005, prices for new homes were up 17.2% year-on-year, while prices for existing properties were up 17.3%. Moreover, house prices have risen 140% since the market took off in 1997. In 2004, housing starts amounted to a record 700,000.

With unemployment still approaching 10%, the Spanish real estate markets is going to be increasingly exposed to a fall in consumer confidence, although the possibility of a sharp adjustment of house prices in Spain in the near term remains low. Nevertheless, the danger is that the crash of a large European real estate market could also ripple through to other such markets in the region.

Copies of CreditWeek’s special report on the housing market are available to subscribers of RatingsDirect, Standard & Poor’s Web-based credit research and analysis system, at www.ratingsdirect.com. Alternatively, call one of the following Standard & Poor’s numbers: Client Support Europe (44) 20-7176-176; London Press Office Hotline (44) 20-7176-3605. Reprinted from www.ratingsdirect.com.

Regional government of Andalusia to make renewable energy systems compulsory
The regional government of Andalusia will make renewable energy systems a compulsory feature of all new developments and major refurbishment projects in future. The government will also ensure that all it’s own buildings are equipped with renewable energy systems. The overall objectives of these new regulations, which will also affect the present system of grants for installing renewable energy, is to reduce the region’s energy dependency, boost local production of renewable energy, and stimulate a successful local industry based on local technology and energy sources.

Spain’s Minister for Housing claims soft landing in progress
María Antonia Trujillo – Spain’s Minister for Housing – has claimed that her department’s policies are successfully engineering a much needed soft landing for the Spanish property market. Using latest government figures that show Spanish property inflation decreasing from 19% in the 1st quarter of this year to 13.9% in the 2nd, Trujillo argues that government programmes to build more social housing and stimulate the rental market are behind this slow down in Spanish property price increases. Cooling down the property market without damaging the wider economy is one of the biggest challenges Spain’s socialist government faces.

Spanish economy more dependent than ever on construction sector
New figures from the National Institute of Statistics (NIE) show how the construction industry has been driving the Spanish economy, accounting for 1 in every 3 new jobs created in the Spain in the last 4 years. The construction sector now contributes 16.2% of GDP, up from 13.3% in the year 2000.

Spain building as many properties as France, Germany and the UK combined
Latest figures from Spain’s Architects’ Association show that the number of new housing starts in Spain have reached all time highs. 206,611 new properties were started in the 1st quarter of the year, up by 12.5% on the previous year, and the first time ever that more than 200,000 new properties have been started in a single quarter. If this rate of housing starts is maintained throughout the year Spain will start 800,000 properties this year, as many as France, Germany and the UK combined. There were 761,471 new housing starts in Spain during 2004, at record at the time. Taking into account the figures for the 1st quarter of 2005, there were 785,000 housing starts in the 12-month period to the end of March 2005 – a new record for Spain.

Sales of Spain’s coastal properties slow after 6 boom years
The Spanish financial newspaper “Cinco Días” reports that sales of holiday homes on the Spanish costas have peaked after 6 years of record growth. High prices and over-development in some areas – a regrettable consequence of the boom – appear to have taken their toll on the demand for Spanish holiday homes. The article goes on to say that Spanish promoters report weaker demand, though it is too early to talk of a recession, as demand is still reasonably strong. According to José Luis Marcos – director of Roan, a Spanish real estate company – the only coast that has suffered a significant drop in sales is the Costa del Sol, principally Marbella and Sotogrande. “The prices in those areas was excessive and an adjustment was needed”, explains Marcos. The article also quotes Chus de Miguel – managing director of the Spanish developer Lar Sol – as saying “Prices are continuing to rise, but at a much slower rate than in previous years”.

35.2% of all properties in Spain are holiday homes or stand empty
In its latest report on the Spanish property market, Metrovacesa – one of Spain’s biggest developers – reveals that 35.2% of Spain’s residential properties are second homes or stand empty, up from 32.2% in 2001. According to the report this demonstrates that “a substantial part of present demand is driven by investors”.

In absolute terms the report finds that almost 8 million of Spain’s 23 million residential properties are not used as principal homes, up from 6.7 million 4 years ago. On present trends there will be close to13 million Spanish properties that are either empty or used as holiday homes by the year 2011.

Spanish mortgage defaults rise for 1st time in 30 months
Spanish Mortgage defaults have risen for the 1st time since September 2002, according to the Spanish Mortgage Association. Nevertheless the rise represents a modest increase to 0.451% from what was a historic low of 0.441%.

Spanish are the biggest buyers of holiday homes in Spain, obviously
Inmueble Magazine reports that the Spanish are the biggest buyers of holiday homes in Spain, contrary to the widely held belief that foreigners buy the majority of Spain’s holiday homes. 16% of all Spain’s housing stock is used as second homes, with an average price of 210,000 Euros, rising to 350,000 Euros in the case of detached properties. Prices for holiday homes are expected to increase by 15% to 16% this year, and 12% to 13% in 2006.

Mortgages to eat up 46.7% of average salary in 2005
A new study by Metrovacesa – one of Spain’s biggest developers – reveals that mortgage payments for the average 20-year mortgage eat up 46.7% of the average Spanish salary, the highest level since the recession of 1993, and 5 percentage points higher than 2004. The study finds that average Spanish property prices are between 20% and 30% overvalued when considered in relation to what average Spanish salaries can afford. Levels of overvaluation are even higher in areas where property prices are above the national average.

Despite evidence that Spanish property is overvalued in relation to incomes the study nevertheless forecasts that Spanish property prices will increase by between 10% and 15% this year, a slowdown from the 17.2% achieved in 2004. If this forecast plays out it will likely mean that Spain has the highest level of real estate inflation in the West in 2005.

The experts at Metrovacesa expect the Spanish property market to continue cooling down, and warn of the risk of possible “situations of excess supply in some local markets, especially in the holiday home market”.

Metrovacesa also expects the number of housing starts to increase by 5% in 2005, with more than 700,000 new properties started, whilst sales are expected to increase by 3%.

Euribor rises, but monthly mortgage payments fall
Euribor – the rate used to calculate mortgage interest payments in Spain – rose for the 2nd month running, from 2.168% in July to 2.223% in August. Despite the increase Euribor is still below the rate in August 2004 (2.302%), meaning that mortgages coming up for annual review will enjoy a fall in monthly mortgage payments. A fall of 0.079 basis points over the last 12 months will lead to a saving of 4.60 Euros per month for the average 20-year mortgage of 120,000 Euros. This means that average monthly mortgage payments will fall to just under 620 Euros.

Spanish families sinking into debt with property. 
Latest figures from the Bank of Spain reveal that Spanish families borrowed 24.3% more in the first 6 months of the year to finance house purchases, with Spanish household indebtedness now reaching historic highs.

At the same time figures from the National Statistics Institute show that the value of the average Spanish mortgage increased by 19.2% between May 2004 and May 2005, reaching 135,646 Euros.

© Mark Stucklin (Spanish Property Insight)