How Solid Is The Spanish Property Market Recovery?

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A recent article in the Spanish daily El Mundo examines the robustness of the housing market recovery, and offers forecasts from a number of experts.

Adaptation and translation of an article published by El Mundo.

The Spanish property market is turning round. It’s gone from depression to a timid reactivation seen in all the statistical guages of its of health. Variables such as property purchases, new mortgages, construction (new-build licences), and even prices are all on the up. In the face of this new scenario, the following question begs answering: Is this recovery solid, or is there a risk of relapse?

Most experts consulted rule out a possible trip-up in the sector (as happened in 2011, after the illusion of recovery in 2010) although they recognise that there are always risks. Analysts base their forecasts on the good economic outlook, the return of credit, and the large adjustment in property prices.

The economist and director of the masters degree in property at the University of Barcelona, Gonzalo Bernardos, is convinced that the current rebirth of property is built, unlike in 2010, on solid foundations. “The economic austerity policies have been left behind, Spanish banks have recovered and are approving mortgages again, and property prices have adjusted more than necessary. The situation is completely different,” he says.

Manuel Romera, director of finance department at the IE Business School agrees. “What happened in 2010 and 2011 has nothing in common with the current situation”. In addition to the positive indicators given by Bernardos, he adds another: “the absorption of supply”.

Equally, Romera says that “there are always risks, but if there was ever a moment without them it’s now. Everything points to a full-blown recovery getting underway,” he claims.

Another group with a lot to say about this reactivation are property developers, who are ultimately responsible for boosting the sector. Juan Antonio Gómez-Pintado, president of the Madrid Association of Property Developers (Asprima in Spanish), prefers to err on the side of caution despite all the statistics showing a clear improvement. “There are still risk scenarios in the macro economy that could have a negative effect,” he warns.

According to Bernardos, the risks threatening the market are a sharp increase in interest rates, political instability, and zero job creation. “None of these seems likely. There isn’t going to be a rise in interest rates, Spain leaving the euro is practically impossible, and jobs will be created, although they’ll be insecure,” he points out.

According to Gómez-Pintado, the industry he represents is at a crucial point where it needs to make an effort to improve its image and, at the same time, stimulate a sustainable recovery. “We need to bet on a different model, one that’s more energy efficient and more industrial. And, of course, we need to take the market into account, and try to keep a balance between properties that are needed and built,” he claims. He calculates that 175,000 new properties a year is the “right level” of building, pointing out that there’s clear demand for them (350,000 purchases in 2014).

As well as property developers, another main player in the property market are Spanish banks. They finance, sell and even develop. Along the same lines as the experts, BBVA and Santander among others have spoken recently of the consistent recovery of the property market.

Among the banks who are most active in the property market is Banco Sabadell with its affiliate Solvia. Its forecasts are also positive. “The scenario we foresee for 2015 is the consolidation of the market’s improvement with sustainable and gradual growth coming afterwards,” says Javier García del Río, business director at Solvia. This company bases its forecast on the increase in GDP, the consolidation of job creation (in terms of both quantity and quality) and the creation of new households (estimated to be 125,000 a year between 2014 and 2018).

Another economist who rules out a property relapse is Miguel Córdoba, lecturer in financial economics at the CEU-San Pablo University. “I don’t believe this will happen because the market is stable at 300,000 to 400,000 transactions a year, which could be the normal level over the next five years and which Spain should have,” he claims. Córdoba believes that the next quarters will be key to finding out if the positive tendency consolidates.

However, Córdoba emphasises that “recovery can’t occur without risks because they exist in all businesses and you have to accept them”. In his opinion, the big danger comes from low salaries. “With a salary of €600 to €1,000 a month, no one can buy a home,” he warns. Romera disagrees and thinks that the job market almost always allows access to a home, rental or purchase. “90 per cent of household wealth is from ownership of the property you live in and at times like these, with interest rates so low, purchasing is much more attractive,” he says.

The formula, according to this lecturer and economist, is simple. “If the annual rental income is equal to 4 or 5 per cent of the value of a home and the interest rate to borrow money and by extension, the cost of a mortgage, is around 1 per cent (plus the Euribor), the maths is clear. It costs much less to buy than rent and those who want to buy a home will see this, which in turn will drive purchases,” he states.

When asked about low quality jobs threatening the market, Bernardos recognises that the current situation is not ideal, but he is confident that this will change. “The future job model will be completely different to today’s. There will be positive labour reform for employees and this will boost the property market,” he maintains. He forecasts a progressive rise in the market, with the resale property sector acting as the main driver, reaching its peak in 2019 and 2020.

Over these years, Bernardos predicts that with economic growth over 3 per cent and a favourable employment situation, between 300,000 and 350,000 properties will be built a year, some 750,000 purchases will be made and around 600,000 mortgages approved. “These figures would be ideal for a healthy sector,” he states. On the other hand, for this expert, prices have dropped too much. “Just as in 2007 the price of property was much higher than it’s real value, now it’s much lower. The market will return to reasonable prices in two or three years. In 2016, prices will go up between 12 and 14 per cent,” he predicts.

Romera offers similar recommendations for the sector. “Building 800,000 properties a year was too much, but the current 35,000 are too few. Building around 300,000 or 400,000 would be coherent if we bear in mind that Spain is also a tourist destination,” he points out. Regarding purchases, he calculates that a balanced level would be around 300,000, although in the first year of significant growth there will be huge demand and it will reach 500,000 or 600,000. “When the pent-up demand runs out, tourists and young people will appear on the scene,” he says. Regarding prices, “the adjustment is over and the upward trend will be very strong,” he warns.

With regards to the matter of mortgages, the director of finance department at the IE Business School does not offer figures, but he foresees normality in the sense that property is a genuine mortgage guarantee. “Anyone who can guarantee repayment and whose financial effort doesn’t exceed 30 to 35 per cent of their income will be able to get a mortgage,” he says. Córdoba is much more cautious in his forecast that puts market balance at 350,000 transactions and 200,000 mortgages a year. Although he rules out price adjustments, he does not believe prices will go up by more than one digit.

To ensure a sustainable recovery of the sector, Romera thinks it’s vital that “banks lend money equally to clients who can pay it back and to projects with demand”. He recommends homebuyers “stop seeing property assets as the answer to everything because they are not”. In this sense, Córdoba points out that “the biggest mistake in the past was the frivolity with which loans were given”. “Now,” he continues, “the Single Supervision Mechanism has come into play and the European Central Bank has control over risks, not the Bank of Spain, so there will be no money for subprime mortgages or debt.”

However, those in the know emphasise that the sector is cyclical. “Markets go up to come down afterwards and property stages last five to six years,” Romera explains. Bernardos also foresees this scenario. “Property will get cheaper again some day, but there’s no indication of this happening in the next five years, nor maybe in 10 or 15 years.” According to this economist, “it will be many years before the players in the sector make mistakes again and I have serious doubts as to whether, when that moment arrives, a bubble as spectacular as the last one could appear again”.

Spanish Property Insight adapts and translates selected articles from the local press for the benefit of non-Spanish speakers.

This translation is based on the following article (in Spanish): ¿Es fiable la recuperación inmobiliaria?



4 thoughts on “How Solid Is The Spanish Property Market Recovery?”

  1. Campbell Ferguson

    It’s at least a two level market. There’s the well located, well built, goo quality property and then there’s the others. For the market as whole to rise, the former prices must be rising more than the latter are still falling. In the best locations there is good development that’s being eagerly bought off-plan. In the poorer, less popular locations, there are few if any buyers and prices are still dropping.

  2. Campbell Ferguson

    It’s at least a two level market. There’s the well located, well built, good quality property and then there’s the others. For the market as whole to rise, the former prices must be rising more than the latter are still falling. In the best locations there is good development that’s being eagerly bought off-plan. In the poorer, less popular locations, there are few if any buyers and prices are still dropping.

  3. David

    I agree with your comment generally, quality always sells. As everyone knows, there’s so much dross property all over the Costas, poorly built ugly urbanisations with various problems. These outnumber the good properties, and are forever on the market dragging down the often talked of rising prices. Not sure who, if anybody, is ever going to mop up the poor quality glut though unless they end up going for social housing by which time it’s bad news for those who bought there. They become tumbleweed ghettos with little or no maintenance.

  4. shakeel

    How can any of them make statement about the predictability of the market. They should know that statistics coming out of Spain are meaning less. One cannot even allow for a margin of error irrespective of the percentage of the margin.

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