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Spanish property market forecasts for 2005

During January several organisations have announced their conclusions on the performance of the Spanish property market in 2004 and forecasts for 2005. Here I summarise and compare them.

In November of last year the Spanish Housing Ministry (Ministerio de Vivienda) released official figures showing that price increases over 12 months to the end of the 3rd quarter amounted to 17,8% on an average national basis. Figures for the whole of 2004 are not yet available but as readers of last month’s bulletin will know I have already voiced scepticism as to the accuracy of official government figures on this question.

During January Antonia Trujillo – the minister for housing – spoke of a possible moderation in the growth of property prices saying, “It is true that there are figures that point towards this change”. She declined to venture any firm predictions for 2005 but did use the opportunity to take a swipe at the housing policy of the previous Government which she described as a failure (the gist of the previous governments policy was radical liberalisation of land classification rules, freeing up more land for building. It basically took the attitude that any land that wasn’t part of a nature reserve was fair game for building on. Unsurprisingly the volume of building land in Spain has risen by 25% over the previous 20 years whilst building land in the rest of the EU has shrunk by 20% over the same period).

According to the Spanish Cadastre (the Cadastre is a local government property registry used for tax and assessment purposes) the average price of property in Spain rose by 11% in 2004. Commenting on this figure the Director of the Cadastre – Jesús Mirana – said that it represents a slow down on previous years and a signifies a trend that he expects to continue over the next few years.

In an exquisite understatement he also commented that on occasions the officials at the Cadastre have noticed that, for some sales, the official transaction price recorded in the deeds is significantly below the cadastral value, implying that some transactions involve a cash element undeclared in the deeds (known in Spain as B-money). The reality, though difficult to quantify, is that many, probably a majority, of resale property transactions in Spain involve a certain amount of B-money that enables the parties involved to evade taxes.

Meanwhile the Council of Spanish Notaries (Consejo General del Notariado) has announced that average Spanish property prices increased by 19% over 11 months to November 2004, with almost all of this increase taking place in the first 6 months of the year. According to figures from the Council of Notaries 703,683 properties were sold over this period last year in Spain, 550,000 of them purchased with mortgage financing. 90% of the mortgages were fixed-interest with an effective annual rate that dropped from 3,57% in January to 3.45% in November. The average duration of mortgages increased from 287 months (24 years) to 306 months (more than 25 years).

CB Richard Ellis – a real estate consultancy – released a report based on a survey of 200 real estate executives showing that the majority of them expect Spanish property prices to increase by 5% to 10% in 2005, lower than in previous years, and that the number of housing starts will fall to 500,000, down from well over 600,000 in 2004.

In its latest report on the Spanish real estate market, BBVA (one of Spain’s biggest banks) has forecast that the rate of Spanish property increases will slow down to 10% in 2005 and 5% in 2006, from around 17% in 2004. Note that 17% in 2004 is a moot point as it does depend upon whose figures you use: the Housing Ministry’s (around 17%), the official appraisal companies’ (various, but Sociedad de Tasación claims 14%), the Notaries’ (19%) or the Cadastre’s (11%).

The bank does not believe that this slow down will have a significant impact on the construction sector nor the Spanish economy. The bank expects that promoters will adjust fairly painlessly to lower demand by reducing the number of properties they build.

The bank goes on to state that “the increase in the number of new and second-hand properties for sale coupled with a modest drop in demand will reduce the rate of sales in new developments to below 4 units sold per month”.

BBVA expects that a property market slowdown will be more marked in those areas where foreigners tend to buy – basically the better know Spanish coasts such as the Costa Del Sol and the Costa Blanca. The report notes that the average time-to-sell in these areas is getting longer and predicts that demand from foreign buyers will decline modestly in the future, though not immediately. Anyone working in the business of selling property to foreigners would contest this claim, as demand from foreign buyers appears to be clearly down compared to previous years. However the report does point out that foreign demand for Spanish property has doubled in 3 years.

Regarding new housing starts the bank forecasts that overall housing starts will fall to 600,000 in 2005, with sharper falls in the coastal areas where foreigners tend to buy.

The research department of Metrovacesa, one of Spain’s biggest real estate companies, has published its yearly report on the Spanish real estate sector in which it says that “all the evidence suggests that property price increases will slow down more in 2005 than they did in 2004″· The report claims that the Spanish real estate sectors has grown for 7 consecutive years with average property prices increasing by 144% over this period. By region the biggest price increases over this period were as follows: Balearics (215%), Murcia (209%), Madrid (168%), Andalusia (162%). In contrast the lowest property price increase were Galicia (83%), Castilla y Leon (83%) and Extremadura (86%).

Metrovacesa concludes that the slowdown will be gradual, that foreign demand for Spanish property will not grow any further and new housing starts will decrease to 550,000 in 2005, down from 660,000 in 2004.

Comparison of Positions

Housing Ministry 17.8% 12 months to end of Q3 No forecast
Cadastre 11% Slowdown
Notaries 19% January – November 2004 No forecast
CB Richard Ellis  – 5% to 10%
BBVA 14% 10% (5% in 2006)
Sociedad de Tasación 14% (new build) Slowdown
Metrovacesa 17% 7% to 15%

Spanish property price inflation has undoubtedly been strong in recent years though accurate figures don’t exist to show us exactly how strong. Most of the Spanish organisations that report on the Spanish real estate market are predicting that prices will continue growing in 2005 and beyond but at a slower, more sustainable rate. On the other hand organisations outside of Spain such as The Economist Magazine, The European Central Bank, The IMF and The OECD, have all voiced serious concern about the price of property in Spain, implying that a sharp fall in prices is a distinct possibility, and in the case of The Economist the most likely outcome.

My advice to anyone considering buying property in Spain in 2005 would be as follows. If you are buying as an owner-occupier with a long-term approach (even if you only plan to use the property for holidays) and you have the finances to buy without taking excessive risks, then go ahead and buy. Over the medium to long-term Spanish property should be a sound investment as well as a property to use and enjoy.

However if you are an amateur investor hoping to earn a fast buck investing in off-plan Spanish property then I advise you to tread very carefully indeed. Don’t commit unless you have the time and resources to carry out thorough research and treat the claims of sales agents with great scepticism, including claims as to how easy it will be to rent out the property. And very importantly don’t invest unless you have the funds to withstand a worst-case scenario in the short to medium term.


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