November 2007 news review

Spanish Property News

Property price to close year 4% up says government
Big banks forecast property price falls
Planning approvals fall by 12.4% but completions rise by 10%
Rural land prices buck the market downturn
Demand on hold in anticipation of property price falls
Big Spanish developers see sales fall by between 30% and 50%
Bank of Spain concerned about debt levels of Spanish developers
Spain builds 25% of all new homes in the EU
Spanish economy vulnerable says IMF
Property transactions fall by 27% in some regions
Spanish mortgage news


Property price to close year 4% up says government

Spanish property price will close the year 4% up on last year according to Rafael Pacheco, head of the government’s architecture and housing policy unit. Annual Spanish property inflation at the end of September was 5.3%, so to fall to 4% by year end the government is assuming that price growth will continue to slow during the last quarter of the year.

Speaking at a conference organised by the Instituto de Empresa business school in Madrid, Pacheco said “the progressive convergence of house prices with consumer price inflation has accelerated,” but he nevertheless predicts a “soft landing” for the Spanish property market in the context of an adjustment for the sector. He ruled out a serious crisis or a “drastic fall in property prices that threatens the national economy,” and pointed out that Euribor has started to decline, which will ease the downward pressure on property prices.

Pacheco also forecast that 550,000 new homes and 100,000 council houses will be built this year, ruling out any “paralysis” in the construction sector.

Regards property transactions, Pacheco forecasts 900,000 this year, down from 1 million in 2006. “This is not a crisis, just a necessary adjustment for the sector,” he said.

Big banks forecast property price falls

After rising in line with general inflation this year Spanish real estate price will fall by between 2% and 8% in 2008, according to a new report from Deutsche Bank.

Although the government forecasts that property price growth will converge on the general inflation rate by year end, the report points out that “nothing guarantees” this outcome.

The government’s forecast was based on a general consumer inflation rate of around 2.7%, but the actual rate leapt to 3.6% in October, and 4.1% in November. The government forecast was based on the previous rate of 2.7%, implying that if the government forecast is accurate, then property prices growth will fall below the general inflation rate by the end of the year – a price fall in real terms.

Deutsche Bank’s report observes that property price falls could lead to fear in the market that accelerates the adjustment process, “especially in the context of the credit crunch.”

The Deutsche Bank report estimates that the Spanish property market is overvalued by 30%, leaving it vulnerable to sharp price falls in reaction to a shock such as a fall in market confidence, or buyer’s delaying the purchase decision.

Deutsche Bank expects, after falling in 2008, Spanish property prices will stabilise in 2009 and grow in line with general inflation.

On the other hand BBVA – one of Spain’s largest banks – forecasts that Spanish property prices will rise by 1.5% this year, 1.4% in 2008, and then fall by 1.9% in 2009. As a consequence BBVA does not expect the downturn in the Spanish property market to do much damage to the Spanish economy.

Planning approvals fall by 12.4% but completions rise by 10%

Planning approvals for new residential properties in Spain fell by 12.4% to 482,789 in the year to August, according to new figures from the Ministry of Development. Planning approvals for detached properties fell by 36.5% to 73,790, whilst apartments fell by 6% to 408,765 units.

But whilst planning approvals have fallen, the number of completed properties has actually risen compared to last year. There were 427,720 construction completions in the first 8 months of this year, a 10% increase on the same period last year. This means that the number of new properties on the market is increasing at a time when demand is falling substantially.

Rural land prices buck the market downturn

Rural land prices in some parts of Spain continue to appreciate at the same rate as last year, reports the Spanish daily ‘ABC’. According to the article experts agree that rural land near to big cities or in areas with good tourism potential is still an excellent investment. The price per hectare for rural land has increased by 30% per year for the last 2 years, but only in areas with the right climate and other conditions suitable for recreation. Though recreational buyers have been driving the market for attractive rural land, 2 other factors are now adding to demand for rural property in Spain: solar energy farms, and cereal farms for biodiesel fuel.

Demand on hold in anticipation of property price falls

Demand for property in Spain may be on hold in anticipation of price falls, according to the head of one of Spain’s largest savings banks. According to an article in the Spanish daily ‘El Mundo’ Juan María Nin, head of La Caixa, believes that the property market is cooling down in an orderly fashion, but worries that if expectations of price falls take root, this could prove very damaging to the market.

Big Spanish developers see sales fall by between 30% and 50%

The downturn in the Spanish property market is hitting the sales of Spanish developers hard. Sales at 3 of the biggest quoted developers – Martinsa-Fadesa, Metrovacesa and Acciona – are down by between 30% and 50% to September this year, according to recent company filings with the stock market regulator. Needless to say, sales could fall even further if buyers hold off in anticipation of price falls.

And talking of price falls, the developer Martinsa-Fadesa does not rule out lowering its prices “if market conditions demand it”, according to a recent article in ‘El Mundo’.  The article reports that Fadesa can afford to lower its prices if necessary for various reasons. Firstly, it has a healthy gross margin of 45% that gives the company room for manoeuvre, and secondly, with a land bank of 28 million square meters, a third of it outside of Spain, Fadesa’s land costs are only 10% of its retail prices, compared to 50% for developers who buy land with planning permission in place. No mention is made of Martinsa-Fadesa’s huge level of debt, and whether the company can afford to lower its prices in a falling market and still meet its interest payments.

Bank of Spain concerned about debt levels of Spanish developers

The Bank of Spain has voiced concerns over the high levels of debt in the housing and construction sector. “It’s a cause for concern that requires the vigilance of management, experts and institutions,” says the bank’s director of research José Luis Malo de Molina.

According to Malo de Molina the housing and construction sector has the highest level of debt in the economy. Borrowing in the construction sector has reached 800% of the sector’s gross value added, compared to 300% in the energy sector, and way above debt levels in other sectors such as transport and telecommunications.

The bank’s concerns have heightened with the recent financial turbulence, which the bank expects to raise borrowing costs even if interest rates fall.

Spain builds 25% of all new homes in the EU

A new study by the consultancy DBK reveals that Spain is the biggest home builder in the European Union by a wide margin. Of the 2.7 million new homes completed in the European Union last year 675,000 of them were located in Spain. This means that Spain built roughly 25% of all the new homes in the EU last year, despite having only 9% of the EU’s population, and generating 9% of the EU ’s GDP.

Spanish economy vulnerable says IMF

Six European countries, including Spain, are vulnerable from the financial turbulence of the sub-prime mortgage crisis and credit crunch says the latest Regional Economic Outlook report from the International Monetary Fund (IMF).

According to the IMF, countries that have experienced rapid house price inflation such as Spain, Belgium, France, Ireland, Holland and the UK are most at risk from the credit crunch, which could hit business investment and construction.

Spain has an additional problem in its large current account deficit, which at 9.1% (forecast 10.2% next year) is one of the biggest in the developed world (by comparison, the infamous US current account deficit is only 5.5%). A current account deficit means that Spain spends more than it earns, which cannot go on indefinitely.

Spain’s high levels of immigration and economic growth justify some increase in Spanish property prices, but according to  Charles Collyns, deputy director of research at the IMF “the rapid increase in house prices and residential investment have gone too far.”

The IMF expects a correction for the Spanish property market, noting that property price inflation is already falling, and that price falls in some cases will not come as a surprise.

The Fund worries that Spain will be one of the countries hardest hit by the fallout from the credit crunch because Spanish banks will find it harder to attract foreign funds to finance the real estate market. With a current account deficit Spain depends upon funds from abroad, much of which end up in the real estate sector. The credit crunch has reduced liquidity and tightened credit terms, which will have a negative impact on construction activity and demand for Spanish property.

Property transactions fall by 27% in some regions

Property transactions in some of Spain’s autonomous regions have fallen by up to 27% on an inter-annual basis, according to the latest figures from the Spanish property register.

Sales over 12 months to the end of June 2007 compared to sales over 12 months to the end of June 2006 were down by 27% in Cantabria, 21% in The Canaries, 20% in Catalonia, 18% in the Valencian Community, and 18% in Galicia. On the other hand sales rose slightly in Asturias, Murcia, and Navarra, and blasted off by 19% in La Rioja. On a national basis sales were down by 8.8%.

Sales over 6 months to the end of June were down by 5.43% compared to the same period last year, with resales falling by 6.9% and new builds by 4.3%.

In the second quarter of this year 205,998 properties were sold – an 11.5% fall compared to the same period last year.

High property prices, tightening credit conditions, and high levels of household indebtedness partly explain the plunging sales rates. According to recent reports Spanish home buyers now spend over 50% of gross income on mortgage payments, rising to 58% in The Balearics, and 57% in Catalonia and Madrid. Household finances are at risk when this ratio rises above 35%.

As a result of high property prices and rising interest rates the average mortgage term has increased to 28 years and 1 month.

Spanish mortgage news

Euribor – the interest rate most commonly used to calculate mortgage payments in Spain – dropped last month to 4.607% (to be confirmed by the Bank of Spain), the second consecutive monthly fall, though Euribor is still 19% higher that it was a year ago.

© 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.