July 2006 news review

The official figures for the performance of the Spanish property market in the 2nd quarter of the year are out (see 1st news item below). It appears that average Spanish property prices rose by 2.9% over 3 months to the end of June, and by 10.8% over 12 months to the end of June.
With official figures showing Spanish property price inflation still in double-digits it doesn’t surprise me how many companies continue to push Spanish property as a ‘hot’ investment. But I have a very different picture of the market. Talking to agents and vendors up and down the Spanish coast it’s obvious that we are in a buyer’s market. In many popular areas supply exceeds demand, buyers are cautious, and property is taking a long time to sell. The very best locations (e.g. beachfront, walking distance to excellent amenities) are still selling well if the price is right, but for the rest of the market it is tough going, and many of the investors who bought mediocre locations off-plan from 2003 onwards are now discovering what it feels like to lose money.

Is it possible to reconcile the double-digit inflation of the official figures with the anecdotal evidence I have of stagnant or falling prices? There must be a reason for the gap, and I’m tinkering with some theories, but none that I can release just yet. In the meantime, if someone tries to sell you a property in Spain on the strength of it being a ‘hot’ investment, then a little scepticism will serve you well.

A full analysis of the latest official figures will be available at the website by the end of August. But otherwise, this being August in Spain, almost everything is shut and everyone has gone to the beach. If you’ll excuse me I also have to visit the beach urgently.

MARK STUCKLIN

FEATURE

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SPANISH PROPERTY MARKET NEWS

Spanish property price inflation slows to 10.8%
The average cost of property in Spain has risen by 10.8% over the last 12 months to the end of June 06, according to the latest figures from the Spanish Ministry of Housing. This represents a modest fall from the 12% Spanish property inflation rate clocked up in the 12-month period to the end of March 06.

Annual Spanish property inflation rates have fallen every quarter since the end of December 04, when the rate of property inflation was 17.2%.

If Spanish property inflation continues to cool at this rate, then Spanish property price increases will fall to general inflation levels of around 4% sometime in 2007. When property price changes are equal to the consumer price index, real property price increases are effectively zero.

Antonia Trujillo – Spain’s Minister for Housing – has stated her department’s objective as gently taking the heat out of the Spanish property market without putting household economies or the national economy under stress. According to Trujillo, “the government is on the right path, as it is now clear that a soft landing for the property market is under way.”

Leading Spanish bank sees increasing risk of property crisis
The latest property market report from the research department of BBVA – one of Spain’s leading banks – has warned that the probability of a crisis or ‘hard landing’ in the medium term for the Spanish property market has increased to 10%. The authors of the report worry that Spanish property prices are rising at an unsustainable rate against a background of rising interest rates, rising household debt, and rising housing starts that increase the supply of property in Spain at a time when demand is under pressure. The report forecasts that, if a hard landing takes place, it will happen during the next year and a half, and will result in a sharp fall in property prices and construction activity. If property prices rise by 20% or more in 2006, then the report increases the possibility of a hard landing from 10% to 40%. “We are worried by the evolution of the property market in the last few months, it has taken us by surprise,” commented Luis Escrivá, Director of Research at the bank.

EU Economy Commissioner warns of Spanish property bubble
Joaquín Almunia – the EU’s Commissioner for Economic and Monetary Affairs – has warned that recent increases in Spanish property prices and Spanish household indebtedness have increased the risks of a Spanish property bubble, though he rules out the possibility of a “abrupt correction” for the Spanish property market. Almunia expects resent increases in Euro-zone interest rates to cool down the Spanish property market. “Rising interest rates must have an effect on families that have become highly indebted very quickly, with savings rates at all time lows,” explains Almunia.

17,000 construction sector jobs lost in Marbella
In the space of a few months the number of construction jobs in the municipality of Marbella is reported to have fallen from 20,000 to 3,000, a reduction of 17,000 jobs. Due to Operation Malaya – a police investigation into municipal corruption in Marbella – the town hall has stopped issuing new building licences, and construction on a number of illegal new developments has been halted.

23.2 million properties in Spain, 1 for every 2 residents
Latest figures from Spain’s Ministry of Housing reveal that Spain’s housing stock now consists of 23,209,842 properties, almost 1 property for every 2 Spanish residents. 68.5% of these properties are first homes, and the remainder are holiday homes or standing empty. 81% of residents in Spain are owner-occupiers, one of the highest rates in the world.

Euribor rises again, increasing mortgage costs
Euribor – the rate used to calculate interest payments for most mortgages in Spain – rose in July to 3.54% (to be confirmed by the Bank of Spain). Since the beginning of 2006 Euribor has risen from 2.78% in December 05 to 3.54% in July 06 – a percentage increase of 27%. Euribor has now risen for 13 consecutive months, from a low of 2.103% in June 2005 to 3.54% today – a percentage increase of 68%. This means that mortgage repayments of variable rate mortgages taken out in Spain are now some 68% more expensive than a year ago.

Spanish households now spending 41% of income on financing property
Latest figures from the Bank of Spain reveal that Spanish families are now spending 41% of gross household income on financing their homes – the highest level in 10 years. The financial burden of buying property in Spain has risen for the 3rd consecutive quarter, up from 36.5% of household income a year ago. The increase is being driven by higher Spanish property prices on the one hand, and rising interest rates leading to higher mortgage repayments on the other. Despite recent increases, the financial burden on Spanish households of purchasing property in Spain is still some way of the 47.5% peak reached in the middle of 1995.

European Central Bank expected to raise base rates in August
Jean-Claude Trichet – the president of the European Central Bank (ECB) – has made it clear that the ECB is likely to raise base rates during the next meeting of the governing council in August. Base rates were left unchanged at 2.75% (US fed funds: 5.25%, UK base rates: 4.5%) in July, having been raised from 2.5% in June.

Only 68% of Spanish properties are full-time residencies
A new report from the BBVA foundation reveals that only 68% of properties in Spain are occupied as primary residencies, down from 95% in 1950. The explosion in the number of holiday homes in Spain is partly responsible for this trend.

Property sector drives 15% of Spanish GDP
According to new figures from the government, the Spanish property sector contributed 142 billion Euros to Spain’s GDP over 12 months to the end of March 2006, the equivalent of 15% of total GDP. This represents a 26.9% rise in the property sector’s contribution to GDP compared to the same period a year earlier. A recent article in The Economist Magazine (Zappy happy on the beach, 27/07/06) puts the property sector at 16% of GDP, and 12% of employment.

© Mark Stucklin (Spanish Property Insight)

 

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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.