According to the latest government figures average Spanish property prices rose by 4.2% in the first quarter of this year. On an annual basis that represents a 15.7% increase in property prices compared to the same period in 2004. On the other hand it does mean that the annual rate of property price inflation dropped from 17.45% at the end of December 2004 to 15.7% at the end of March 2005. The Spanish government, keen to engineer a soft landing for the property market, has sized upon this modest decline in annual price increases as proof that it’s policies are beginning to work. However these figures also coincide with a new method for calculating the figures, which makes interpreting them more difficult.

Looking at the latest 12-month price increases by Autonomous region Castilla La Mancha – an inland region where few Brits buy property – was the best performer with an increase of 23.5%, followed by the Valencian Region (18.3%), Andalusia (17.9%) and Murica (17%). However it is worth noting that, though average prices in Murcia have risen by 17% over 12 months, they actually fell by 0.4% in the first quarter of this year. Price in Extremadura – just emerging onto the British buyer’s radar – rose by 4.3% in the first quarter, a 15.5% increase over the year. This represents an impressive increase by Extremeñan standards, but despite this robust increase Extremadura remains the cheapest province in which to buy property in Spain. Prices in Teruel, another of Spain’s cheapest provinces for property that is attracting increasing interest from British buyers, rose by 22% over 12 months, though price fell by 2.2% in the first quarter. Price increases in other regions popular with British buyers include the Balearics (13%), and Asturias, Cantabria and the Canaries all on 11%.

After the latest increases Madrid continues to be the most expensive region, with average property prices of 2,617 Euros /m2, followed by the Basque Country (2,445 Euros/m2), Catalonia (1,929 Euros /m2), and the Balearics (1,890 Euros /m2). Malaga on the Costa del Sol is now one of the most expensive provinces in Spain, with prices of 1,909 Euros /m2, behind only Barcelona, Madrid, and the 3 Basque provinces. At the other end of the scale is the region of Extremadura, where average prices are only 836 Euros /m2.

In the first quarter of this year there were 5.4% fewer valuations than in the same period of 2004. This is further proof that the velocity of sales is slowing, something that estate agents have known for a while. With a bit of luck this trend will continue in an orderly fashion and the market will glide down to a period of relatively price stability, something the Spanish property market badly needs.

In recent months the European Central Bank, the IMF, The OECD, The Economist Magazine, and the Bank of Spain (amongst others) have all raised their doubts about the sustainability of property inflation in Spain. Given Spain’s over dependence on the real estate sector for economic growth, a crunch in the Spanish property market could cause greater economic damage in Spain than in other countries. This explains why the government is so keen to interpret a 15.7% increase as a sign that its policies to cool the market are working. But if prices continue on a double-digit trajectory for many more quarters then a painful crisis in the market becomes more likely. At this point in time what the market needs is a period of property price stability in which prices rise between 5% and 10% per year, or simply track inflation. The latest figures provide modest grounds for optimism that this might be achieved.

During the first quarter of the year the number of property valuations conducted fell by 5.4% compared to the previous year. This implies a fall in the number of transactions, which would help to take some of the heat out of the market.

© Mark Stucklin (Spanish Property Insight)