Too many homes in the wrong place, too much red tape

marbella club beach

All the new housing inventory in places like Marbella, with beaches like this, will sell

Spain’s real estate problem is not so much a glut as too many homes in the wrong place, and too much red tape in the industry.

Talk to any well-informed insider in the Spanish real estate business and they will all tell you the same thing; there are too many homes for sale in the wrong location, and not enough for sale where people want them.

One of the nefarious consequences of a real estate boom is that punchdrunk developers start building in out-of-the-way locations, gung-ho lenders happily provide the financing, and hyped up investors start buying off-plan, creating a false sense of security. But when the bubble pops these developments are revealed for what they really – speculative projects based on cheap land. Nobody actually wants to live there.

It happens in the second half of every runaway real estate boom, and Spain was no exception (and Spain is a big, empty country, which exacerbates the problem). There are now thousands of lifeless new developments on the outskirts of provincial Spanish capitals and hard-to-reach locations near the coast. There is simply no demand for these locations at any price. Many of these homes will never sell, and some may have to be demolished, though that costs money too.

If all the new developments had been built in locations that appeal to some market segment, there would be no problem in the medium run. Where there is demand, there is a solution – it’s just a question of price.

In the short-run there is also an inventory of new developments for sale in great locations in Spanish cities, suburbs, and on the coast. There is strong demand for these locations, and all of these homes will sell in the next few years, many of them below their replacement cost. Then will come an acute shortage of new homes, as housing starts have collapsed, and the lead time in this industry is around four years at best. The only reason these homes have not yet sold is because of Spain’s economic crisis and credit crunch, both of which will pass.

Spanish Building costs will have to come down

costa-del-sol-gibraltar-constructionThat said, it’s not just a problem of too many homes in the wrong location, and not enough in the right location. Building costs in Spain are still too high, even after land prices have collapsed, in some cases to zero.

A recent article in the Spanish press highlighted this problem, citing the architect Gregorio Marañón Medina, and the Investment Manager Pablo Atienza, both industry insiders.

Whilst acknowledging the problem of too many homes in the wrong location, they also argued that the cost of doing business as a developer is now too high to make home building viable. And home building is crucial to the economy and employment, they point out.

House prices in many parts of Spain, including prime city centres, are below replacement costs (the cost of building new), often with land priced at zero. So even if developers could get financing, which they can’t, it doesn’t make sense to build if they have to sell at a loss (some upmarket projects do make sense now, but that’s a tiny segment of the market and a different story).

Building costs have come down in the crisis, including land prices, building materials, labour and professional fees (of architects in particular). But efficiency has not gone up enough, and taxes and licence fees are still far too high, argue Marañón and Atienza. Mainly thanks to taxes, licences, and complex building regulations and planning laws, most new developments in Spain would now be unprofitable, which is storing up an housing crisis in the not-too-distant future. As is often the case in Spain, the Government is a big part of the problem.

Until the national and regional politicians get it into their heads that they have to reduce the burden of tax and regulations on real estate, this crisis is not going away.



14 thoughts on “Too many homes in the wrong place, too much red tape”

  1. Henk Vantyen

    Well, if there is too much stock of existing houses, it *should* be too expensive to build new ones. That’s basic markets doing their function. Only when surplus stock has cleared, it will be profitable again to add to the stock. (I understand architects and builders don’t want to hear that, though).

    1. catalanbrian

      Exactly. It is high time that people got it into their heads that this is exactly how markets work. Now, whether a “market economy” is a good thing or not is another issue! Regrettably, however most people really like the idea of a market economy when it is working in their favour, but when it works against them (and that is what sometimes happens with markets) they are not so keen.

  2. Buster

    When considering the unholy alliance between government & financiers (Banksters), who are now trying to sell off these foreclosed properties, how likely is it that rules & fees will be relaxed that allow developers who have even managed to survive to build new properties that will effectively add competition to the Banksters sales of their looting?
    I suspect we’ll see even more handicapping of free market functioning until the bank sales are complete, while the Sheeple will continue to scratch their heads in perplexion at why the government continue such ‘madness’, which actually is in keeping with everything else we are observing throughout the economies of the World, namely corporately run governments under the guise of democracy otherwise known as ‘Corporate Fascism’ or Corporatism, the preferred model of control employed by such great ‘visionaries’ as Hitler & Mussolini.
    God help us all!!

    1. Profile photo of Mark Stücklin

      All around towns all over Spain, over-ambitious golf developments in places like Murcia, and parts of the Spanish coast. I’m not too worried about the homes actually on the coast – most of them will sell in time.

  3. Marilyn Ward

    Thank you for your excellent newsletter. Not normally being one to ‘join in’ and I don’t know my twitter from my tweet from my blog from my … , I felt I should let the great buying public in on something I have just found out. We were in the throes of purchasing a large property in the Valencian region last week when a) on the day when we were due to sign contracts, the Valencian authorities upped the purchase tax from 8% to 10%, which would have added 10,000 euros to our costs AND, my excellent lawyer informed us that although one might pay a vastly reduced price now for properties, the authorities have the right to charge you the purchase tax on their valuation of the property, notwithstanding its current value. In our case, this could have amounted to a further 70,000 euros as the house was valued last year at 1.2M euros. We had never been told this before, and it means that we must factor this possibility into the price we are able to pay initially. Apparently the authorities have the right to levy the difference for up to five years.

    1. Lionel Westell

      I would advise you negotiate the price down to cover these extra costs, as I tell my wife when she sees a nice dress in a window in a cash short Month. There will be another available shortly ! So keep looking and negotiating.

      1. Laura

        Yes but…Marilyn risks losing her deposit if the seller balks at renegotiating the price and the sale is derailed as a result. The seller is not to blame for the tax hike nor for the possibility that the local government might choose to assess the property at a price higher than the sale price. He could very well say no dice and if Marilyn isn’t willing to proceed at the agreed upon purchase price she would be out whatever deposit she has put on the house. That said, in some cases it is worth it to lose the deposit to get out of a lousy deal.

    2. Profile photo of Mark Stücklin

      Marilyn, it’s bad news for the vendor, more than anyone. You just have to adjust your offer down so you end up paying the same, and the vendor gets less.

      1. Paul W

        Mark, could you clarify for the novice here please where the Government would obtain the valuation they feel their tax should apply to? Your comment on reducing your price further seems logical but it would be helpful to quantify. Appreciated

  4. Lionel Westell

    To give a current example of the banks slow commercial response.
    I have a puchaser for a bank owned town house, cash. The banks agents, posted on the property, do not respond to calls. The Bank now inform me that they can see me, but only in September after the holiday break in August. That’s when he he has the word returns, however as paperwork has not yet been completed we may have to wait even further. Properties in the wrong place, isolated, not coastal locations would name it for me. Close to Valencia Villas with pools, once at 400.000 plus on offer at 120.000 Euros. Near my own location, 80.000 Euros or nearest offer. Added problem for empty properties, they are emptied in weeks once left, even doors and windows are removed !! Plus all removable fixed furniture. I agree this will take at least 4 years to change and demolition is an only answer in many cases.

  5. Bede

    Good, concise article with only one thing I would disagree with. The idea that the economic crisis and credit crunch will be over at some time in the foreseeable future. Why? Wages are falling, unemployment rising, public debt continues to rise requiring increased taxes/more cuts. All of this leads to a shrinking economy. So if people can’t afford houses now, why will they be able to afford them in the future with less money and increased insecurity? In this scenario where will the banks get their money from in order to be able to lend?

    The world has changed. Economic cycles don’t really exist any more. Europe, not just Spain, will get progressively poorer because it can’t compete with the BRIIC economies unless it drastically reduces labour costs. Existing properties in undesirable locations will be bulldozed, left to decay or occupied by marginalised communities. The declining birth rate and negative immigration will mean that spain’s population will fall – reducing further any potential demand for properties. There will be no more large scale building in Spain for decades, if ever….

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