Property prices in Madrid must fall 34pc to revive the market

Property prices in the Spanish capital have to fall 34% all told to bring the market back to life, argues a new report from Aguirre Newman, one of Spain’s leading real estate consultancies. What is true of the capital is also true of much of the rest of Spain.

Property prices in Madrid have already fallen by an average of 14% in the last 2 years, including a drop of 8% in the last 12 months, but that isn’t enough to stimulate demand and get the market going again, says the report. Prices need to fall another 20% for that to happen, which is what it will take to ensure that the average family can afford to buy again.

Recent falls in interest rates mean that monthly mortgage payments for the average borrower in Madrid are down between 33% and 35%, this despite the fact that banks and savings banks have not passed on the full savings to be had from lower interest rates.

Nevertheless, at present prices, households in Madrid still need to spend 40% of gross income to buy a home, 10 percentage points more than the 30% that experts recommended, and that banks now demand as a condition for lending. So prices need to fall further before households can afford to buy, and to bring the housing affordability ratio back to its long term average.

This poses a serious problem for developers, point out Aguirre Newman. Prices have to fall 34% in total before housing is again affordable, but many developers can’t lower their prices by more than 20% without going into negative equity, having borrowed 80% to finance their developments. As a result, Aguirre Newman expects lenders to repossess an increasing number of developments as bad debts surge.

The only bright spot for developers in Madrid right now are rent-to-buy contracts, says the report. Under this arrangement rental payments count towards the purchase price if a rental client decides to buy within a specified time frame. Rents tend to be 15% to 20% above market rents, and should cover the developer’s mortgage payments. 16% of new developments in Madrid are now offering rent-to-buy contracts, compared to less than 1% in 2006.

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