February 2008 Spanish Property News review

Spanish Property News

+ Bullet points news roundup
+ Speculative demand for Spanish property evaporates
+ The Spanish property market downturn continues
+ Savings banks warn that property downturn will be “more traumatic” than expected
+ Costa Brava holiday home market also in trouble
+ UN report on Spanish housing market problems
+ Spanish mortgage news
+ Getting the most from your pension in Spain
+ Spain’s new ‘read-to-move-in’ homes make buying easier and more affordable
+ Noriega investment builds confidence in the Spanish property sector
+ Hacienda del Alamo introduces the ‘Spanish Village’


Bullet points news roundup

  • The river Segura water region (Confederación Hidrográfica del Segura) is in crisis, with water levels in the region’s dams falling to just 3% of capacity. The river Segura is the main source of water for Murcia, some parts of Almeria, and the Southern Valencian region. “We are facing a catastrophe both in terms of water for crops and drinking water,” says Manuel Aldeger, of the local water board.
  • Eduardo Zaplana – spokesman for the opposition PP party – has suggested that the Socialist government is propping up large Spanish developers to avoid the electoral embarrassment of a high profile bankruptcy before the national elections on 9 March. On the other hand Pedro Solbes – Spain’s finance minister – continues to block plans by Zapatero’s (Spanish president) economic advisers to bail out Spanish developers with taxpayers’ money.
  • Antonia Moreno, the secretary general of the Socialist Party in Orihuela, Alicante, has claimed that there are between 10,000 and 15,000 officially illegal properties in the Orihuela municipality, though in reality there could be as many as 30,000 illegal properties built without appropriate planning permission.
  • The Spanish tax authorities are investigating 80,000 new property developments in Spain for tax fraud, focusing on transactions involving 500 Euro notes (known as ‘Bin Ladens’). The real estate sector is reported to be the principal source of fraud and corruption in Spain.
  • 10%-15% of property transactions in Spain are reported to becoming unstuck as buyers find that banks will not lend them money once the sale has been agreed.
  • Spanish investment in residential property outside of Spain rose by 44% to 2.9 billion Euros in the first 11 months of 2007 compared to the same period in 2006. This is a clear sign that Spanish property investors are diversifying out of Spanish property.
  • Only 44% of Spanish banks and savings banks are prepared to lend to Spanish developers for principal housing projects, down from 91% a year ago. For second home developments, the figure falls to 20%.
  • Half of all insurers will not provide credit insurance to companies in Spain’s real estate sector due to fears of rising defaults. Those Spanish real estate companies that can get credit insurance are having to pay premiums up to 30% higher than last year.
  • The stock market capitalisation of Spain’s quoted property developers has fallen from a 52 week high of 51 billion Euros to 19 billion Euros today – a 63% fall.
  • According to Santiago Baena, president of the COAPI estate agents professional body, 40,000 Spanish real estate agencies closed in 2007 (50% of the total), destroying some 120,000 jobs, and 80% of vendors who managed to sell a property in 2007 had to reduce the price significantly. Coastal areas and the holiday home market were the hardest hit, with prices falling an average of 20%. Baena claims that the bubble has now burst, and prices for resale properties will not fall any further.
  • New developments are taking 3 years to sell, up from a year and a half at the start of 2005, when Spain’s real estate market first started to cool. “Talk of a soft landing is misplaced, this is a hard landing in every respect,” Ignacio Pindado of the consultancy Grupo i is quoted as saying.
  • The G-14 group of leading Spanish property developers estimates that 466,000 construction sector jobs will be lost this year if new property sales fall to a forecast 305,000, down from 503,000 in 2007. The G-14 insist that buying a property in Spain is still a profitable long term investment, and expect sales to pick up if mortgage payments starting falling in response to the recent fall in Euribor.
  • The Bank of Spain has warned that Spain’s economic slowdown, which started last  year, will be “somewhat more pronounced” in the first part of 2008.
  • Small and medium sized construction companies have called on the Spanish government to spend another 8 billion Euros of the budget surplus on public construction projects to cushion the blow of Spain’s property market downturn.

Speculative demand for Spanish property evaporates

The Spanish daily ‘El Pais’ reports that speculative demand for Spanish property has evaporated, creating more woes for Spanish developers hoping to sell off-plan. Sales of some of Spain’s biggest developers are reported to have fallen around 30% – 40% towards the end of 2007.

The Spanish real estate consultancy Aguirre Newman estimates that speculative off-plan investors were responsible for around 40% of demand for new property during the boom. These investors have now largely disappeared from the market, and the few that remain are said to be demanding big discounts from developers.

Developers also have to contend with their former investor clients undercutting their prices. According to some forecasts, investors will place around 700,000 properties on the market this year, to add to the growing number of properties that developer are unable to shift.

The Spanish property market downturn continues

Various statistics confirming the continuing slowdown in the Spanish property market were released in February.

According to the ministry of development (fomento), planning approvals fell 25% in 2007 to 651,427, a long way from the record 865,561 planning approvals in 2006. The fall accelerated towards the end of the year, falling by 40.5% in December alone.

Housing appraisals, typically carried out for mortgage valuations, also fell in 2007, providing further evidence of falling activity in the Spanish housing sector. According to figures from Spain’s ministry of housing, appraisals fell by 17% to 798,063 last year, and fell by almost 30% in Madrid. It also emerged that demand for cement has fallen to the lowest level in 11 years, and that construction sector output fell by 6.2% in November 2007.

But if planning approvals and appraisals fell in 2007, the same cannot be said of construction completions, which rose 9.5% to 641,419. Due to long lead times in the construction business, the number of newly built properties coming on to the market is rising at a time when demand has all but collapsed.

Savings banks warn that property downturn will be “more traumatic” than expected

In its latest report on the economy, the Spanish savings banks’ association FUNCAS  warns that the Spanish property market downturn might turn out to be “more traumatic than envisaged at the start of 2007.”

The report suggests that construction sector output is falling twice as fast as the 10% – 15% falls expected in a ‘soft landing’ scenario.

Despite evidence of a more severe correction than (they) expected, the report tries to find the silver lining. “Demand will return, albeit with less impetus than at the top of the cycle. Regardless of the level at which demand settles, it is likely to be more mature and exacting than in the past.”

Note that any report on the property market from Spain’s savings banks has a vested interest in downplaying the severity of the housing market situation. Savings banks are heavily exposed to the property market, and can’t afford to tell it like it is.

The report also argues that Spanish economic growth will fall to 2.6% in 2008, leading to an increase in unemployment. For what it’s worth I think Spanish GDP growth will be negative in 2008, with a massive surge in unemployment, especially amongst immigrants.

Costa Brava holiday home market also falling

An article in the Spanish daily ‘El Pais’ reports that the holiday home market in Catalonia is set to collapse this year, following in the footsteps of southern coasts like the Costa del Sol and Costa Blanca.

According to the latest forecasts from real estate consultancy Grupo i, demand for holiday homes in Catalonia will fall by 45% from 51,647 to 28,213 homes this year,  whilst the consultancy Aguirre Newman forecasts that sales on the Costa Brava will fall by 50% during 2008.

The British-dominated holiday home market on Southern Spanish coasts was the first and hardest to be hit by what the Spanish press has taken to calling the ‘real estate crisis’. Being less dependent upon foreign demand – 80% of holiday home buyers in Catalonia are Spaniards – many were hoping last year that Catalonia would escape relatively unscathed from the emerging downturn starting to besiege coastal property markets further south. Now it appears that economic realities and the bursting property bubble have caught up with Catalonia too.

The article reports that speculative real estate investors were the first to disappear from the market, noting that they represented 35% of demand, according to Cushman & Wakefield – a real estate consultancy. Investors are now being followed out of the market by families who can’t get mortgages for holiday homes because of the credit crunch. Increasing competition is also reducing demand in Catalonia, where property is relatively expensive. Xavier Font, director of Tourism studies at Leeds Metropolitan University explains that British buyers are now heading for low cost alternatives such as Cyprus, Croatia, Turkey, and Egypt. “Catalonia has the advantage of security over those countries,” Font is quoted as saying, “but compared to France, Greece, or Italy, property in Catalonia is expensive.”

Frontline beach property is selling best in the difficult market, the Costa Brava is doing better than the Costa Dorada, and the posh north Costa Brava around Begur and Pals is doing better than the downmarket areas of Tossa and Lloret de Mar.

UN report on Spanish property

A un report on the Spanish housing market was the subject of several articles in the Spanish press during February.

Written by Miloon Kothari, the UN’s special rapporteur on housing, the report identifies housing affordability, rising mortgage delinquency rates, and a lack of social housing and rental accommodation as serious and growing problems for Spain (virtually all housing in Spain is privately owned, with only 2 per cent of dwellings classified as public social housing compared to 10 to 30 per cent in other countries of the European Union).The report reserves its strongest criticism, however, for the housing distortions created by speculation.

“Speculation in housing has been a major source of extreme profits from which only some large developers have benefited,” says the report. “As a result of the priority given to an unregulated homeownership model, Spain possesses the largest number of vacant houses of the European Union. According to the 2001 census, vacant dwellings represent around 15 per cent of the total housing stock (more than 3 million units, not taking into account secondary residences). This percentage largely exceeds the estimated present deficit in rental housing market (about 800,000 units). Speculation and the financial benefits generated by housing have reportedly led to large-scale corruption.”

Spanish mortgage news

Euribor – the interest rate most commonly used to calculate mortgage payments in Spain – fell for the second consecutive month in February to 4.349% (to be confirmed by the Bank of Spain).

Even though Euribor fell in February, borrowers on annually-resetting variable rate mortgages will find their monthly mortgage payments rise, because Euribor is still 6.2% higher than it was 12 months ago (down from 22% higher in December 2007).

Monthly mortgage repayments on a typical 149,000 Euros loan with a 26 year term and a rate of Euribor +0.5% will rise from 819 Euros to 841 Euros per month, a monthly increase of 22 Euros, and a yearly increase of 264 Euros. So falling interest rates are not yet translating into falling mortgage repayments for borrowers on annual resets, as Euribor is still higher than it was a year ago.

Borrowers with 6-monthly resets, however, will now pay 28 Euros per month less, a saving of around 334 Euros per year.

Euribor is derived from the ECB base rates, which were left unchanged at 4% in February. The ECB remain hawkish on inflation concerns, and has not followed the Fed or the Bank of England in cutting rates since the subprime mortgage and credit crunch problems emerged. Most analysts expect the ECB to start lowering base rates this year, which explain the recent fall in Euribor.

Having said that, cheaper mortgage rates are not translating into easier access to credit for many potential borrowers. In the light of the credit crunch Spanish banks are now much more wary about lending, and far fewer mortgage applications are approved.

Getting the most from your pension in Spain

Many Britons wait until they retire before moving to Spain so that they do not have to worry about earning a living, relying instead on their pension to provide a regular income. If you have contributed to a pension scheme during your working life you will want to get the most from it that can be taken. + more

Spain’s new ‘read-to-move-in’ homes make buying easier and more affordable

New homes at the Desert Springs golf resort in south-east Spain are being sold fully-furnished so that purchasers can enjoy living in them from the moment they receive the keys. + more

Noriega investment builds confidence in the Spanish property sector

As the sub-prime credit crunch and the recent announcement of the closure of nearly half of the estate agents based in Spain continues to dampen enthusiasm for overseas investment, one Spanish developer and construction company, Noriega, has decided to instil confidence in a flagging market with a €90m investment in the Realia Group. + more

Hacienda del Alamo introduces the ‘Spanish Village’

The spectacular new “Spanish Village” development is now close to opening at Hacienda del Alamo Golf Resort, hailed as “Spain´s New Number One” and the sales team are taking deposits on both commercial and residential properties. + more


© 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.