September 2006 news review

What do Spaniards think of the state of their property market? Anyone thinking of buying or selling property in Spain should be curious to know, given that the market would bomb if Spaniards lost faith. Fortunately, a recent survey reported in the Spanish press by Madrid’s Chamber of Commerce gives us an insight into local attitudes towards the property market. It seems that, in Madrid at least, Spaniards are still optimistic about property (Madrileños are also big buyers of holiday properties on the coast). Only 9% of respondents expect property prices to fall in future, whilst 17% expect prices to stabilise. A full 68% expect the Spanish property boom to roll on, despite the fact that interest rates are now on the rise, as is the stock of unsold properties. They may turn out to be mistaken, and there are signs that market has already slowed significantly in some coastal areas, but it’s good to know that locals don’t appear to have lost confidence in the Spanish property market.

This month in the forum: A discussion about how to deal with a ‘dubious developer’.


Take the sting out of the bills
Taxes and fees are inevitable when you buy in Spain, but do your homework and you can avoid the hidden costs that lurk at every turn.


Spanish property market cooling, land prices falling, but property professionals discount hard landing
The present state of the Spanish property market was the subject of various articles in the Spanish and international press during September.

The Spanish online daily ‘El Confidencial’ reported property market experts predicting Spanish property inflation of less than 10% in 2006, the lowest level in 6 years. According to the latest figures provided by the Spanish government, annual property inflation at the end of June was 10.8% and falling, down from 12% at the end of March, and the 6th consecutive quarterly fall. The high level of new housing starts in Spain is one of the main reasons given for explaining the cooling of Spanish property inflation.

A clear sign of the cooling property market is the fall in land prices in some parts of Spain. According to ‘El Confidencial’ the average price of building land in municipalities with populations of over 50,000 fell by 1.4% in the first quarter of the year compared to the same period in 2005. In Madrid, the fall was much more dramatic at 17.4%. In Barcelona, however, land prices rose by 12.3% in the same period, showing that, whilst there is an overall trend towards falling prices, land prices also respond to local factors. Land prices are one of the principal components of the cost of homes, along with labour, building materials, financing costs and developers’ margins.

But various local property professionals quoted in the Spanish press during September see little risk of the cooling property market turning into a hard landing. According to Guillermo Chicote – President of the Association of Developers and Constructors of Spain (APCE) – “There will be no cataclysm,” whilst according to Pablo Díaz Romeral – Technical Director of an appraisal company Tasamadrid –a “soft landing” is in progress.

On the other hand, a bearish article in the Wall Street Journal in September highlighted the risks to the Spanish economy of a hard landing for the property market. A booming real estate sector has been the driver of Spanish economic growth, consumption and new employment for the last 10 years. If this engine were to sputter, the wider economic and social problems in Spain could be serious.

Which is precisely the subject of a new report from Deutsche Bank, released in the last few days and entitled ‘What if the Spanish housing market weakens?’ The report points out that downturn in the Spanish property market is “inevitable, sooner or later”, and that the consequences of a real estate sector downturn will be felt “on many fronts”.

The most vulnerable front, according to the report, is the public financing of municipalities, regional governments, and even the national government. Having made some effort to diversify, developers and banks are better prepared for a downturn, whilst all levels of government are still heavily dependent upon taxes gathered from the real estate sector.

The report points out that a slowdown in construction activity will put pressure on Spain’s social security system, as unemployment rises and the benefits of granting work permits to illegal immigrants – many of whom found work in construction – disappear.

The report points out the risks to the Spanish economy of a property market downturn, but does not forecast any hard-landing scenario in the next year. Deutsche Bank expects a gradual slowdown to continue in 2007, but warns that the risks of a more dramatic fall could increase in 2008. The sign that a downturn has started will be a fall in the number of housing starts, something that has not yet happened.

Euribor and mortgage repayments up by 67% in 12 months
Euribor – the rate used to calculate interest payments for most mortgages in Spain – rose in September to 3.715% (to be confirmed by the Bank of Spain). After 12th consecutive monthly increases Euribor is now 67% higher than it was a year ago, taking mortgage repayments up by the same amount.

With general consumer price inflation in Spain running at 3.7%, this is the first time in 4 years that Euribor has been higher than inflation. So, for the first time in 4 years, mortgage borrowers in Spain are not benefiting from negative real interest rates.

According to the National Institute of Statistics (INE), the average mortgage value in June was 153,978 Euros (184,950 in Madrid), 15.6% higher than a year ago. Bigger mortgages and rising interest rates mean that average monthly mortgage repayments have gone up by 172 Euros to 732 Euros per month, all according to figures from the INE. Other sources calculate that average mortgage repayments will go up by between 110 and 130 Euros per month, some 1,320 to 1,560 Euros more per year.

Some mortgage experts in Spain believe that mortgage borrowers will be able to cope with rates as high as 4% without distress, so long as the rise in rates is gradual and Spain manages to maintain its present levels of employment. This argument is supported by the fact that mortgage defaults in Spain are at all-time lows (less than 0.5%), despite the intense rise in interest rates over the last 12 months.

Although Euribor has risen strongly, it should be noted that interest rates in Spain are still low by historical standards. But because of the dramatic rise in Spanish property prices over the last decade, coupled with the recent rise in interest rates, the value of average mortgage repayments in Spain is now getting close to the level reached in 1992, just before Spain’s property market crisis of 1992 – 1994.

Markets expect the European Central Bank to raise base rates by 0.25% to 3.25% in October.

IMF warning on Spanish property prices
The International Monetary Fund has once again voiced concerns over the high level of property prices in Spain. In its latest report on the world economic outlook the IMF points out that Spain’s high property prices are especially worrying given that interest rates are increasing. The Fund also singles out The UK and Ireland for their high property prices.

Spanish shares more profitable than Spanish property
The Spanish financial daily ‘Expansion’ reports that owning shares in Spanish companies is more profitable over the long-term than owning Spanish property. The IBEX – Spain’s stock market index – has delivered annual returns of 11.4% (26% in the case of the biggest companies in the index) since it was started at the end of the 1980s, whilst Spanish property has delivered average annual returns of 8.8% over the same period. 100 Euros invested in the Spanish stock market index in 1988 would now be worth 317 Euros, whilst 100 Euros invested in Spanish property would now be worth 267 Euros.

The Economist global house-price indicator shows Spain slowing down
House prices are increasingly important to whole economies, which is why The Economist Magazine publishes quarterly global-house price indicators. The latest indicators, out in September, reveal that Spain has fallen to the middle of the pack, with an annual property inflation rate of 10.8%. Denmark now leads the countries included in the survey with property inflation of 23.6%, followed by Belgium (18%), Ireland (15.4%) and France (14.3%). According to The Economist Spanish property prices have risen by 173% since 1997.

The Economist Global House Price Indicator

Ski resort projects in the Pyrenees send land prices soaring 
A ski resort building frenzy in the Pyrenees of Aragon has sent land prices soaring, reports the local daily ‘El Periódico de Aragón’. Developers are signing option contracts for rustic land at more than 240,000 Euros per hectare, 100 times the value of rustic land without planning permission. Land prices in certain localities are 8 times higher than they were just 20 months ago, when a hectare cost 30,000 Euros.

Mallorca leads the market for expensive property on the coast
A new report by property consultants Foro Consultores finds that Mallorca has the highest coastal property prices in Spain, higher even that the ‘Golden Mile’ between Marbella and Puerto Banus. According to the report, the highest coastal property prices in Mallorca reach 4,744 Euros/m2 in Bendinat.

Tourist apartments in Barcelona squeeze out long-term residents
The Spanish daily ‘El Periódico de Catalunya’ reports that the growth in the number of tourist apartments in Barcelona’s beachfront district of Barceloneta is forcing out long-term residents, who can no longer find properties for rent in the area. The large difference in rental income between long-term rentals and short-term tourist rentals, which are much more profitable, explains why ever fewer landlords wish to rent to long-term tenants. For instance, a flat of 30m2 rents for between 400 and 800 Euros per month to long-term tenants, compared to 1,800 to 3,000 Euros to tourists. Long-term residents of Barceloneta complain that the behaviour of the increasing number of young tourists staying in the area is harming their quality of life.

Resale property prices in Barcelona increase by 3% in 3rd quarter
A new report from the real estate agency network ‘Comprarcasa’ reveals that average resale property prices in Barcelona increased by 3% in the 3rd quarter of the year, and by 16% over 12 months to the end of September. The report also finds that: a) property price inflation in Barcelona is slowing gradually, b) the average property in Barcelona now takes 9 months to sell, c) property inflation in Barcelona will fall to single digits in 2007.

Spanish property rental prices increase 4.4%
Average Spanish property rental prices have increased by 4.4% over 12 months to the end of August, according to the National Institute of Statistics (INE). With annual inflation in Spain running at 3.7% to the end of August, this means real rents (adjusted for inflation) increased by only 0.7% over the last 12 months. In the meantime, average Spanish property prices rose by 10.8% over 12 months to the end of June, so average gross rental yields – already low in Spain – would have fallen by around 6% in the period.

Licences required to rent out property in Balearics
New regulations introduced by the Balearic government mean that owners need an official permit to rent out their properties to tourists on a short-term, commercial basis. The deadline for applying for permits was Friday 29 September.

© 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