Schizo is how I would describe the behaviour of the Spanish property market in 2005. On the one hand the overall market has been booming, with property prices, mortgage lending and housing starts all surging to record levels. But in many coastal areas, where foreigners tend to buy, the market has been suffering from mood swings and mild depression (with the exception of the super-luxury segment, which has been very chipper). That was the reality of 2005.

So what’s on the cards for the Spanish property market in 2006? Will the market find it’s way to healthy stability or descend into a deep funk? Early in the New Year I will produce a summary of all the published forecasts in an attempt to help try and answer this question. In the meantime, I’d like to wish you a healthy, happy and prosperous 2006.

MARK STUCKLIN

IN DEPTH

Spanish resale property prices up 16% by end of 3rd quarter
According to valuations carried out by Tinsa – one of Spain’s leading appraisal companies – average Spanish resale property prices rose by 16.6% over the 12 months to the end of September 2005.

As always, there were wide variations in property price inflation between Spain’s different regions.

The province with the highest growth in resale prices was Valencia with 27%, followed by Cadiz in Andalusia (26%) and Tarragona in Catalonia (24%). The provinces with the lowest rate of growth in resale prices over the last 12 months were Santa Cruz de Tenerife in the Canaries (8%), Ourense in Galicia (9%), and Palencia in Castilla y Leon (11%).

Price changes in provincial capitals were more marked than for provinces as a whole. Resale property prices increased by 31% in the city of Valencia, once again due to the impact of the Americas Cup. Prices were up by 29% in the city of Tarragona, and 27% in Malaga city – the capital of the Costa del Sol.

The worst performing provincial capitals were Oviedo in Asturias, up only 4%, Lugo in Galicia (6%), and Ourense, also in Galicia, up 7%.

Despite the generally robust rate of property price increases over the last 12 months, the underlying trend appears to be one of slowing or stagnating growth rates.

According to Tinsa’s valuations, property inflation remained unchanged or fell in all but 2 of Spain’s autonomous regions over the last 12 months. The 2 exceptions were Extremadura, were 12-month property inflation rose from 16.2% in the 2nd quarter to 17.3% in the 3rd, and Asturias, where property inflation rose from 10% to 13.8%. On a national level property inflation dropped from 17.2% in the 2nd quarter to 16.6% in the 3rd. Compared to a year ago, national property inflation is down from 19.1%, the equivalent of a 13% drop in the rate of property price inflation.

After the latest increases the average price of resale property in Spain stands at 1,773 Euros/m2. The average price for provincial capitals is 2,305 Euros/m2, and 1,484 Euros/m2 for resale property outside of Spain’s provincial capitals.

Quoted in the Spanish daily “La Vanguardia”, Ildefonso Ortega – president of Tinsa – said of Spanish property prices that trend was “gradual falling”. Commenting on property sales times he said “The time it takes to sale a property has doubled from between 2 – 3 months up to 4 – 5 months”.

SPANISH PROPERTY MARKET NEWS

The Economist Magazine issues another Spanish property bubble warning
The Economist Magazine has issued yet another warning of a housing bubble in several developed economies, including Spain.

Commenting on a recent report on the rich world’s housing markets from the OECD, The Economist argues that Spain’s housing market is more than 25% overvalued, only behind Australia and Britain.

The OECD report attempts to judge the ‘fair’ value of homes by comparing the current price-rents ratio of property with an adjusted “fundamental” ratio based on the ‘user cost’, which the report calculates by taking account of interest rates, tax relief, property taxes, maintenance costs and expected inflation. According to the report, only Britain, the Netherlands and Ireland have significantly overvalued housing (i.e., by 15% or more). Spain is modestly overvalued, but America, France, Sweden and New Zealand look reasonably close to fair value. Homes in Germany and Japan are undervalued by more than 20%.

However The Economist argues that the report is based on numbers that are already out of date (averages for 2004). Using more recent figures for the 3rd quarter of 2005, The Economist finds that Spain is suffering from one of the most serious cases of over-valuation.

25% of Spaniards consider access to housing a serious problem
A new study by Funcas – a foundation run by Spanish savings banks – finds that 25% of Spaniards consider access to housing the 3rd biggest problem facing Spanish society. For 18% it is their main preoccupation.

According to the survey, 51% of Spanish households own their property outright with no mortgage, 24% are still paying off a mortgage, and 18% live in rented accommodation. Average monthly mortgage payments are 467 Euros, and average monthly rents are 357 Euros. The relatively small difference of 110 Euros between owning with a mortgage and renting makes buying a more attractive option.

A Funcas report also reveals that 51% of Spaniards feel that Spain’s economic circumstances have deteriorated over the last 12 months, compared to 11% who feel they have improved, and 38% who see no change. 34% expect the economy to deteriorate even further over the next 12 months, 22% expect it to improve, and 44% expect no change.

European Central Bank raises interest rates for 1st time in 5 years
The ECB raised Euro-zone base rates from 2.00% to 2.25% on the 1st December – a 12.5% increase, and the first increase in 5 years. The rise was expected by the markets, and had already been incorporated into Euribor – the rate used to calculate mortgage repayments in Spain – which rose to 2.684% in November. Since the base rate increase Euribor has continued to rise.

The ECB justified the rise by saying it was necessary to “stimulate growth and contain inflationary pressures”. Many commentators and finance ministers, however, condemned the rise as risky and premature.

Many expect the ECB to raise rates again in the spring, probably by another quarter point (0.25%). Some believe that rates will rise to 2.75% by the end of 2006, whilst American Express Funds believes that rates could rise as far as 3%.

Base rates at present in the UK, US and Euro-zone are as follows:

UK: 4.50%
US: 4.25%
EU: 2.25%

Major residential development plans for the coasts of Andalusia and Murcia
On 3rd December the Spanish daily ‘El Pais’ reported that costal municipalities in Murcia and Almeria (Andalucia) have drawn up plans to reclassify rural land for building on an enormous scale, with a view to building approximately 500,000 new properties and 25 new golf courses. If realised, these plans would represent an explosion in both housing stock and populations for these areas, and would mean the obliteration of virgin coastline.

For example in Cuevas de Almanzora (Almeria), population 11,000, the town council has submitted plans for the construction of 148,000 properties to house 500,000 people, compared to the 13,000 properties envisaged in the existing plan. The local water authority has warned that there is not enough water in the area for this much housing, though this hasn’t stopped some 40 developers from forging ahead with their plans.

Until recently Palomares was nothing more than a little hamlet some 500 metres above sea level in the municipal district of Cuevas. Palomares is where the US air force lost an H-bomb on January 17th 1966. A B-52 bomber carrying 4 hydrogen bombs collided with a refuelling plane in the skies above Palomares, and several of the bombs disintegrated, scattering plutonium dust over the area. In today’s development frenzy Palomares has become an enormous building site, which has cause the Nuclear Security Agency to worry about the risks of disturbing buried radioactive material. The Board has recommended that the government expropriate the ground affected by the crash.

On19th December ‘El Pais’ reported on major development plans in the province of Malaga, home to the Costa del Sol, which runs from Nerja in the east to San Roque in the west.

There are at present 791,859 properties on the cadastral register for Malaga (paying rates), the majority of them on the coast. New urban plans being submitted by municipalities in the province envisage more than 600,000 new properties over the next 10 to 12 years, 540,000 of them on the coast. Under this scenario construction on an already over-developed coastline will double. The Costa del Sol is already one long semi-urban strip that hosts 44 or Andalusia’s 87 golf courses (many more golf courses are projected).

Benehavis and Estepona are good examples of municipalities that have presented highly expansive urban plans. Benehavis, present population 2,265 inhabitants, plans 90,000 new properties. Estepona plans 82,000 new properties on top of the 32,000 properties already built in the area. In comparison the provincial capital of Malaga only plans 78,000 new properties, despite having a population 10 times greater than Estepona’s.

Carlos Hernández-Pezzi – the president of Spain’s Superior College of Architects – does not believe that the region can cope with this scale of new development, even if the infrastructure is upgraded. The article quotes him as saying “There are limits to how much development the area can withstand, and municipal authorities should realise this”. Even José Prado – president of the regional developers and builders association – confess to being shocked at the scale of new development plans. The article quotes him as saying that these development plans are “unsustainable without the appropriate infrastructure”. Both Hernández-Pezzi and Prado seem to agree that the existing infrastructure is woefully inadequate, even for today’s needs.

European parliament’s criticisms of Valencian “land grab” laws ignored
After receiving 15,000 complaints from affected owners the European parliament in Strasbourg has issued a damning criticism of the Valencian Region’s planning laws (Ley Reguladora de la Actividad Urbanística) that enable promoters to expropriate private property for development against an owner’s will. The Fourtou report from the EU also calls for a moratorium on new projects until improved regulations are in place. However, Charles McCreevy – speaking for the European Commission – says that a new law (Ley Urbanística Valenciana) being passed by the Valencian government “doesn’t appear to correct the faults of the previous law”.

Later in December the Valencian government went ahead with the approval of the new law, turning a deaf ear to all the criticism and recommendations from the EU.

Holiday home investments expected to double in the next 5 years
“Live In Spain” – an organisation backed by several leading Spanish developers – forecasts that spending on Spanish holiday homes will double from approximately 25 billion Euros in 2005 to 45 billion Euros by 2010. The number of holiday homes purchased is expected to rise from approximately 117,000 in 2005 to 150,000 in 2010. There are at present an estimated 3.7 million holiday homes in Spain, of which 1.7 million are believed to belong to foreigners, 70% of who are British and German.

Renovations gaining in popularity
The latest report from Euroconstruct forecasts that growth in the construction of new Spanish housing will fall from 4.8% this year to 2.8% in 2006, whilst the renovation of existing properties will grow from 3.7% in 2005 to 4% in 2006. Housing starts in Spain are higher than in any other European country, and whilst housing represents an average of 24% of construction activity in Europe, in Spain this figure rises to 34%.

1.2 million old Spanish properties need to be replaced
A new report from the Spanish savings bank Caixa Catalunya argues that Spain has 1.2 million properties built before 1920 that need to be replaced with newly built housing. There are also 2.6 million properties built between 1921 and 1960 that will need substantial refurbishment.

Bank of Spain warns that a fall in Spanish property prices will harm consumer demand
In a new report entitled “The Spanish Economy in a Long Phase of Expansion” the Bank of Spain has warned that a correction in the price of Spanish property could undermine the domestic demand that has been one of the driving forces behind Spain’s long economic expansion. The report identifies increasing household debt, over valued property, and the loss of Spanish competitiveness as some of the biggest challenges facing the economy. The Bank expects Spanish property price inflation to slow down but counts out any crash in prices.

Seville strips Marbella town hall of planning authority
Manuel Chaves – President of Andalusia’s regional government – has announced measures to strip Marbella town hall of key urban planning powers. These measures were not unexpected, given Marbella’s history as a renegade municipality in all matters related to urban planning.

Government to produce new house price index allowing comparisons with Europe
In the 2nd half of 2006 the Spanish government’s National Institute of Statistics (INE) will start publishing a new house price index that has been standardised for easy comparison with the rest of Europe. This is the result of an initiative promoted by the European Central Bank.

Spain more dependent on real estate wealth than any other OECD country
A new report from Caixa Catalunya finds that, relative to national income, Spain has more private wealth stored in real estate then any other OECD country. Thanks to Spain’s ongoing real estate boom the value of the average household’s wealth tied up in property and other fixed assets has risen to 10 times disposable income, up from around 7 times disposable income in 1995. Total private household wealth tied up in real estate has reached 600% of spanish GDP.

‘Chinacity’ proposal for Alicante
A consortium of chinese investors has proposed the creation of a 400,000 square metre ‘chinese theme park city’ in Alicante. Costing over 300 million Euros to develop, the city will include massage and acupuncture clinics, shops, restaurants and temples, and will be called ‘Chinacity’.

Wave of new urbanisations threaten Galicia’s virgin coastline
A total of 35,000 new properties, 17 golf courses and 24 marinas are under construction, approved or under consideration for the coast of Galicia, in the northwest of Spain. This could have a dramatic impact on Galicia’s 1,700 kilometres of coastline.

Barcelona’s land bank to dry up in 10 years
A new report from Catalonia’s College of Industrial Engineers entitled ‘Housing, Social Cohesion, and Sustainability’ argues that, within 10 years, all the remaining building land in metropolitan Barcelona will have been used up.

45-year Spanish mortgages around the corner
Mortgages with a lifespan of 40 years are now available in Spain for the first time, and mortgage experts predict that that 45-year mortgages will soon be available.

Girona is province with highest cost of living
Another recent study by Funcas reveals that the province of Girona – home to the Costa Brava – has the highest cost of living in Spain, followed by Barcelona, the Basque provinces, the Balearics and La Rioja. The Spanish provinces where the cost of living is cheapest are Badajoz (Extremadura), Cuenca (Castilla La Manca), Ciudad Real (Castilla La Mancha) and Cáceres (Extremadura). The cost of living in Girona and Barcelona is almost 20% higher than in Badajoz.

Newly-built Spanish properties waste energy
Newly-built properties in Spain consume 40% more energy than comparable properties in France, according to Arturo Gonzalo Aizpiri, General Secretary for the Prevention of Contamination and Climate Change. This is because Spanish promoters have “completely abandoned” insulation and energy conservation methods.

© Mark Stucklin (Spanish Property Insight)