This report gives an overview of price developments in the Spanish real estate market during the last few years.

The prices we use are the average Spanish property prices published by the Spanish government. These figures help one understand the direction and extent to which property prices have been changing in Spain over the last few years. When it comes to trying to estimate the value of a specific Spanish property they are less indicative.

Nevertheless for anyone buying or selling property in Spain it is helpful to know the overall momentum of the property market. Are you buying or selling at a time when prices are peaking or bottoming out? Are prices steady or changing fast? In this report we provide you with some basic facts about the Spanish property market to leave you better informed when you make your buy or sell decisions.

Spanish property price developments

1. Overview

The Spanish real estate market has experienced a long bull run with prices increasing every year over 11 years from 1993 to the end of 2003. In 2004 the trend has continued with average spanish real estate prices rising 9% in the first 6 months, equivalent to 17.42% over the last 12 months to the end of June 2004.

Some people selling property in Spain are prone to claim that Spanish real estate prices have only ever risen and therefore that Spanish property is the safest investment you can make. This is not true. Spanish real estate prices in nominal terms actually declined by 7.4% in 1992, and when looked at in real terms (after adjusting for inflatioin) Spanish real estate prices declined for 5 years between 1992 and 1996.

Over a 5-year period from the end of 1998 to the end of 2003 (base year 1998=100) average national Spanish real estate prices for all types of property have increased by 105% – that is to say they have more than doubled in 5 years. 1999 was the year the real lift-off began, with property prices increasing every year since then by double didgits in nominal terms and the rate of increase getting larger each year. Since 1987 average Spanish real estate prices have increase by 337%, more than tipling despite the falling prices of 1992. Even after adjusting for inflation Spanish property prices have increased by double didgits every year since 2000.

2. Average Spanish Property Prices By Region

The following chart shows changes in the average price of property in certain autonomous regions of Spain. Only regions that are an important destination for foreign buyers have been selected.

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Bear in mind that there are significant variations in price within these autonomous regions as prices can vary dramatically even over a few kilometres (generally speaking the further inland a property is located the lower the price). These figures only give the average price for all types of Spanish property within each autonomous region, for instance lumping together the price of property in Marbella (high) with the price in Mogón (low) to arrive at the average price for Andalusia. Nevertheless the figures do give us an idea of what is going on in the real estate market for each region.

The following table gives us a comparison by selected region of real estate price increases over the last 5 years, using 1998 as the base year.

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Where as average national property prices have increased by 105% we can see that prices in the Balearics have rise 126% over the same period – the highest regional rise in all of Spain. At the other end of the scale is Galicia where prices have only risen by 51% over the same period – 75% less than in the Balearics.

However these figures should be understood for what they are – average regional price increases. The reason why the Balearics seem to have risen more than, say, Andalusia where the Costa Del Sol is located, is because the Balearics are much smaller than Andalusia and much more of the property there is concentrated in popular tourist destinations. If you were to compare property prices on the coast around Marbella with the Balearics, rather than prices for the whole of Andalusia, the story would be very different, with prices rises being more or less equal.

The next chart compares average property prices per square metre for selected regions at the end of 2003.

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It should also be noted that the high average price of property in Catalonia (29% higher than the national average) is largely due to the effect of property prices in Barcelona (Barcelona and Madrid have by far the highest average prices for property in Spain). Property prices in Catalonia’s other coastal provinces such as Girona and Tarragona are below the national average.

3. Average Spanish Property Prices By Age of Property

The following table shows the average price of property in Spain according to its age.

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Spanish property that is less than 1 year old commands the highest price and is 15% more expensive the national average whilst property that is over 20 years old costs 5% below the national average. The reason being that property depreciates with time and, if all other things are equal, people (in Spain at least) prefer a brand new property in perfect condition to one that is several years old and suffering from wear and tear.

However the location of property, the land it is built on, also has an important impact on the value of property. It is interesting to note, as shown in the graph below, that the value of older property has been rising faster than the value of newly built property in recent years. This is because most of the prime locations have now been built on, meaning that many new developments are taking place on 2nd or 3rd tier locations (with views of the motorway). What does this mean? It means that location is becoming more important than ever in determing the value of real estate in Spain.

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Price changes for new properties tend to be more dramatic than changes for older properties. They also tend to pre-empt price changes for properties that are more than 20 years old.

It should be noted that provisional figures for the whole of 2003 (rather than 12 months to the end of September) indicate that new properties increased in price by 18.5% in 2003. If this is borne out in the official government figures for the whole of 2003, then new build prices will have increased in 2003 by more than the 17% registered in 2002. In figure 6 above the rate of price change for new properties appears to decrease from 17% in 2002 to 16% in 2003. Once the full year 2003 figures are released this decrease in the rate of change is likely to become an increase.

International property price comparisons

The following chart compares real (adjusted for inflation) property price changes over the period 1992 – 2002 for a selection of European countries.

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Over the last 10 years Spain has offered the best real price increases on continental Europe. However both the UK and Ireland have produced higher real gains over this period. We can see that, despite the significant increase in Spanish real estate prices over the last few years, Spain is by no means out of line with other European countries in terms of real increases in property prices.

The following chart shows the relationship between the average price of property and the GDP per capita for a selection of developed countries.

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This chart shows that Spanish real estate prices are not out of line when compared to other countries.

In the past, Spanish property prices were considerably lower than in other European countries. However property prices in Spain are now around 75% of the European average, and GDP per capita in Spain is also about 75% of the European average. This would suggest that Spanish property prices are now in line with other European countries.

Spanish property market conclusions

By now it should be obvious to readers that Spanish real estate prices have been rising fast over recent years. Figure 2 of this report – the chart that shows both average national property prices by year and plots the rate of increase each year – says it all.

However when you take step back and compare the price of property in Spain to other European countries the price rises of recent years do not seem quite so alarming. Real prices have risen but not as much as in other countries such as the UK and Ireland and in relation to GDP Spanish real estate prices are in the middle of the pack. On the other hand we have not included some ratios, for instance the price of property in relation to rents or the price of property in relation to average disposable income, compared to other European countries, that do make the Spanish property market look very out of balance.

There are some obvious factors that explain the recent rise in Spanish property prices that we shall briefly list here as follows:

• Historically low interest rates that reduce the cost of borrowing thus enabling more buyers to afford a mortgage.
• Innovations in the Spanish mortgage market with longer mortgage periods and higher loan-to-value ratios being offered. Despite an increase in property prices average monthly mortgage payments have fallen in relation to disposable income.
• Economic growth and increasing employment in Spain that has enabled more people to finance a mortgage.
• A growing number of foreigners buying Spanish property (primarily in coastal regions) thus pushing up demand for Spanish property. Since January 1999 foreign investment in Spanish property has risen from under 200 million Euros a month to 600 million Euros a month.
• 80% of Spanish households are owner-occupiers. This is the highest level in Europe. The Spanish custom of buying property rather than renting helps to keep demand for property strong.

Whilst these factors continue to hold true and in particular whilst interest rates remain low (interest rates are set by the ECB with France and Germany more in mind than Spain) there is no ominous reason to expect that property prices on a national level will tank. Having said that it is unlikely that prices will continue to increase at the white-hot level of recent years and we would not be surprised if overall prices stagnated for a few years. Furthermore we believe that, though property on a national level should hold up, cetain types of property in some costal areas where 1) supply is expanding fast and 2) off-plan investors with flimsy balance sheets have over-extended, prices could easily fall.

© Mark Stucklin (Spanish Property Insight)