It’s always a pleasure to listen to a well articulated presentation from a big brain. Martin Wolf – chief economics commentator at the Financial Times – brought his XXL brain to Spain recently for a conference organised by Barcelona’s IESE business school. After all the regurgitated arguments one tends to hear about Spanish property investments it was refreshing to listen to some really powerful and insightful thoughts, though it has to be said his presentation had nothing to do with Spanish property.

Martin Wolf’s presentation was essentially about the imbalances building up in the world economy, with the Anglo sphere countries (in which he included Spain) spending Asian savings. In his opinion this can’t go on forever and at some point there is likely to be a painful dollar adjustment.

However he did also point out the lack of productive investment opportunities in Europe and the developed world, which is where most Europeans feel comfortable investing, and that real interest rates in the Euro Zone are far too high (he would cut them in half). European savings are struggling to find productive European investment opportunities, and Euro Zone real interest rates may fall, which to my mind will funnel increasing amounts of private money into real estate and life-style investments. If he is right (and if I’m right about what his conclusions will mean for the Spanish property market) then Spain’s golf and coastal real estate projects, combining property, life style, leisure, security, retirement, health and investment attractions, could be some of the biggest beneficiaries of this trend. A painful Dollar adjustment might also encourage more savings to stay put in Europe, where economies are already having trouble absorbing savings, which could also increase real estate investments in Europe.

On the other hand he did raise concerns about ‘Southern Europe’s’ economic outlook, and suggested that the working age will have to rise as we live longer, both of which could have a negative impact on demand for Spanish property. On balance, though, I thought the issues he raised more likely to support an increase in long-term Northern-European investment in Spain’s real estate resorts. However in the short term over supply and the unreasonable price expectations of vendors are creating problems in some of Spain’s coastal markets. And in the long term Spain will have to sort out its water problem before it can realise the full potential of its real estate sector.

MARK STUCKLIN

IN DEPTH

A review and analysis of the Spanish real estate market’s performance in the 1st quarter of 2005.

SPANISH PROPERTY MARKET NEWS

Cost of housing in relation to income lower in Spain
A new study by Analistas Financieros Internacionales and Asprima (Madrid’s Association of Developers) reveals that Spanish property prices in relation to average household income are 10% below the same ratio in Germany and 12% the UK. Nevertheless the ratio of house prices to incomes is slightly higher in Spain than in France, Belgium and Sweden. Average Spanish property prices are now more than 9 times average net household income (one salary), and the costs of financing property eat up on average 25.4% of net household income in Spain.

More figures provided by the study show that, after the Spanish property price increases of the last few years, it now requires personal savings equivalent to 20 months of the average Spanish salary to stump up the 20% in personal equity typically required to buy a property in Spain (mortgage lenders normally only offer 80% loan-to-value). In 1999 it only required 10 months of the average Spanish salary to finance 20% of the average Spanish properties, revealing that average Spanish property prices have increased at double the rate of salaries in Spain over the last 5 years.

As a consequence the financial burden of housing rose from 23.3% of average household income (2 salaries) in 2003 to 24.6% in 2004 – a 5.5% increase in the financial burden. This is the highest level since 1996, but still a long way from the 33% limit recommended by mortgage lenders.

Size doesn’t matter to the Spanish….. It’s location that counts
Seven out of 10 Spaniards (71.4%) would buy a smaller apartment in the centre of the city over a larger property in the suburbs, according to a new survey of 1,500 Spaniards carried out by Iberplaco. Time wasted commuting to work was the main reason given for choosing location over size.

Construction sector drives economic growth in Spain
Construction was once again the most dynamic sector in the Spanish economy during 2004, growing by 4.21% – well above other sectors. By Region Andalusia’s construction sector turned in the strongest growth, with 6.7%, whilst the most anaemic growth took place in Asturias (2.9%) and the Balearics (2%). Overall the Spanish economy grew by 3.2% in 2004.

Federation of Andalusian Developers forecasts more price increases
After several months of forecasts all pointing towards a slow down in the growth of Spanish property prices, the Federation of Andalusian Developers has raised a contrasting voice. Andalusia’s developers expect demand to continue increasing, forecasting that 145,000 new homes will be sold in Andalusia in 2005. The developers cite new demand driven by the arrival of millions of immigrants, who tend to buy their first property after 6 years in Spain, and the 24% increase in new mortgage lending during the first quarter of the year.

Spanish property overvalued by between 24 and 35% says the Bank of Spain. The Economist magazine also puts in the boot
The Bank of Spain has once again voiced concerns over the price of Spanish property, this time in its annual economic report (2004). In the bank’s opinion, Spanish property is now overvalued by between 24 and 35%, compared to 8 to 20% in 2002. The bank recommends various measures to guide the property market to a soft landing, including a more neutral fiscal policy towards property owners and measures to stimulate the rental market. The bank views a property bubble as one of the principal threats to the health of the Spanish economy.

Also in June The Economist Magazine ran another bearish article on the property market outlook in many countries, including Spain. The Economist frets that property markets in these countries are being driven by speculators expecting prices to rise rather than buyers looking for housing, and points out that property prices compared to rents – a proxy for the price / earnings ratio used to value equities – have significantly diverged from the long-term average. “Calculations by The Economist show that house prices have hit record levels in relation to rents in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. This suggests that homes are even more over-valued than at previous peaks, from which prices typically fell in real terms. House prices are also at record levels in relation to incomes in these nine countries.”

The article goes onto explain that “To bring the ratio of prices to rents back to some sort of fair value, either rents must rise sharply or prices must fall. After many previous house-price booms most of the adjustment came through inflation pushing up rents and incomes, while home prices stayed broadly flat. But today, with inflation much lower, a similar process would take years. For example, if rents rise by an annual 2.5%, house prices would need to remain flat for 12 years to bring America’s ratio of house prices to rents back to its long-term norm. Elsewhere it would take even longer. It seems more likely, then, that prices will fall.” The Economist attributes the increase in property prices in the countries it fingers to historically low interest rates and the disappointing performance of equities as an investment since the heady days of the dotcom era.

Spanish property more accessible than ever says BBVA
BBVA – Spain’s second largest bank by market capitalisation and one of Europe’s 10 largest banks – has published optimistic conclusions in it’s latest report on the Spanish property market, challenging the pessimism coming from the Bank of Spain. BBVA’s direct of research – José Luis Escrivá – considers Spanish household wealth to be in fine shape, and points out that the capacity of Spanish households to meet property financing costs has risen more than property prices in recent years. BBVA’s study reveals that of the 14.5 million households in Spain, only 44% of them have debts, of which only 7% (3% of the total) have debt financing costs greater than 40% of income. According to Escrivá, the present level of household debt in Spain is sustainable, and is a perfectly rational response to the present climate of low interest rates and lengthening mortgage periods.

Nevertheless Escrivá does point out that the ability to afford property varies markedly from region to region. Property purchasing power in Extremadura and Castilla La Mancha is far above the price of property in those regions, whilst the financial effort required of Spanish families in Madrid, The Balearics and the Basque Country pushes the limit of household property purchasing power.

BBVA’s latest study also includes a revised forecast of Spanish property price growth in 2005. The bank now forecasts that property prices will rise by 12% in 2005, up from the 10% forecast it made at the beginning of the year.

Foreigners investing less in Spanish property
New figures from the Bank of Spain reveal that foreign investment in Spanish property has fallen off substantially this year. Whilst foreign investment in Spanish property dropped by 5% in the course of 2004, in January 2005 the drop was 25% compared to January 2004, and 7% in February. Overall, foreigners buying homes in Spain invested 856 million Euros in the first 2 months of the year, 15% down on the 1.017 billion Euros invested in the same period of 2004.

Meanwhile the President of the provincial association of constructors and developers of Malaga has been reported by La Opinión de Málaga as saying that the number of properties bought by foreigners on the Costa del Sol during 2004 fell 17.3% compared to 2003, down from 18,500 to 15,300 properties. He also points out that whilst German buyers represented 32% of all foreign property buyers on the Costa del Sol during 2002, by 2004 they had fallen to just 3% of the overseas buyers market – a 90% drop in market share. There were 44,958 housing starts in the Province of Malaga during 2004, a 1.5% increase on the previous year.

Spain and the UK create more new millionaires than any other European countries
A new report by Merrill Lynch and Cap Gemini reveals that 141,000 new millionaires (people with liquid assets of more than 1 million Dollars) were created in Spain during 2004, an increase of 8.7% on the previous year and second only to the UK in Europe (418,000 new millionaires, an 8.9% increase).

Average time to sell a Spanish property on the increase
New figures from the Spanish estate agency Don Piso reveal that the average time to sell a property in Spain has increased by 41%, or almost a month, from 61 days in 2003 to 86 days (over 2.5 months) in 2005. According to Don Piso the number of properties put up for sale increased by 20% in 2004, and 52.4% of property instructions in 2004 resulted in a sale. New promotions were the best sellers, with 72% of all new promotions selling out within a year.

Water shortages create problems for new developments on Spain’s Mediterranean coast
With Spain in the grip of a drought and reservoirs only 58.3% full, Spanish promoters are having trouble finding development sites with adequate access to water on Spain’s Mediterranean coastline. Residential developments and golf resorts in many of Spain’s driest regions will be difficult or impossible until a sustainable solution to recurrent water problems has been found.

Holiday homes account for 27.7% of demand for Spanish property
Grupo I – a research consultancy – forecasts in a new report that 117,000 holiday homes, equivalent to 27.7% of all Spanish property sales, will be sold in 2005, with an increased number of Spanish buyers compensating for the drop in foreign buyers. The report forecasts that second home sales will increase by between 3.5 and 5% each year, reaching a total of 150,000 holiday home sales by 2010. The report identifies increasing competition for holiday homebuyers from countries such as Morocco, Tunis, Croatia, Portugal, Greece, Cyprus, Malta and Turkey, but concludes, “The Spanish market still enjoys a significant advantage over the competition”.

65% of Spanish wealth tied up in property
A new study from the Foundation of Spanish Savings Banks (Funcas) reveals that 65% of private wealth in Spain (or 2 out of every 3 Euros of Spanish savings) is now tied up in property. Relentless increases in Spanish property prices over the past decade have helped to triple the amount of Spanish wealth tied up in property, and increase the property’s share of wealth relative to other asset classes. 90% of the increase in wealth held in property is due to rising prices, whilst 10% is due to an increase in the overall stock of property being held by Spaniards. With 65% of private wealth held in property, Spain’s private wealth portfolio is significantly less diversified than countries such as France (10%), the UK (30%) and Germany (40%).

According to the report Spanish real estate prices have increased by an average of 10.5% every year from 1995 to 2004, whilst the Spanish housing stock increased by 1.5% a year over the same period. Both of these trends accelerated in 2004, with Spanish property wealth increasing by 20%, prices by 17.5% and the housing stock by 2.2% – the highest level of growth in the last 10 years.

20 month’s salary required for down payment on Spanish property
After the Spanish property price increases of the last few years it now requires personal savings equivalent to 20 months of the average Spanish salary to stump up the 20% in personal equity typically required to buy a property in Spain (mortgage lenders normally only offer 80% loan-to-value). In 1999 it only required 10 months of the average Spanish salary to finance 20% of the average Spanish properties, revealing that average property prices have increased at double the rate of salaries in Spain over the last 5 years.

As a consequence the financial burden of housing rose from 23.3% of average household income (2 salaries) in 2003 to 24.6% in 2004 – a 5.5% increase in the financial burden. This is the highest level since 1996, but still a long way from the 33% limit recommended by mortgage lenders.

Euribor falls to lowest level in 13 months, mortgage lending hits new record
Euribor – the benchmark interest rate used to calculate Euro Zone mortgages – fell from 2.265% in April to 2.193% in May – the lowest level since April 2004, and the 3rd monthly decline. This means that monthly mortgage payments for the average Spanish mortgage of 120,000 Euros at 20 years will drop 6 Euros to 618 Euros per month.

Meanwhile according to the Spanish Mortgage Association (AHE), mortgage lending in Spain rose by 24.82% in April compared to the previous year, hitting a new record of 628,4 billion Euros.

Stock of rental properties in Spain down by 1 million since 2001
According to the Secretary of State for the Economy – David Vergara – the number of Spanish rental properties (being rented or on offer for rent) has fallen by 1 million from 9% of the total housing stock in 2001 to 6% today. Stimulating the rental market and making housing more accessible to poorer sections of Spanish society is one of the Government’s top priorities, though efforts so far have been plagued by controversy and results disappointing.

Spanish household wealth up 85% in 5 years
According to a new report by Caixa Catalunya – a Spanish savings bank – Spanish household wealth has increased by 85.5% over the 5 years from 1998 to 2003, largely due to increasing property prices – up by 116% over this period.

© Mark Stucklin (Spanish Property Insight)