Spanish property can be bought as a home or an investment, or a combination of both. Most foreign buyers are looking for a home that they also hope will be a good investment, but in the recent boom years more people approached Spanish property as a pure investment, in line with the growing trend of property investing in the places like the UK and Ireland. After a decade of good returns, the investment potential looks like it has peaked.

Spanish property has been an excellent investment in recent years, with uninterrupted nominal capital appreciation for more than a decade, and prices up 89% over 4 years to the end of 2004. However this trend cannot go on forever, and realistically speaking the Spanish economy’s capacity to absorb large property price increases has probably been spent for the time being. But whilst Spanish property is unlikely to continue to be a ‘growth stock’, attractive homes should still hold capital value over the long term, and provide owners with other types of value such as a home for living in the holidays.

In the short term some of the most popular coastal areas such as the Costa del Sol may well pass through choppy waters in which speculative investors lose money, with prices stagnating or declining in these areas.

Bad timing is causing problems for many of the British off-plan speculators who bought in the last couple of years in the hope of earning high profits (as promised by estate agents) by selling on before completion. Misguided speculation fed by credulous amateur investors partly explains why there are now too many properties chasing too few buyers, and investors are finding it difficult or impossible to sell on before completion. Investors are also finding that the estate agents who were so eager to sell them the investments in the first place are not interested in helping them sell on and realise their investments (the commissions aren’t high enough). Rash investors who have overextended and cannot afford to complete have to sell on at any price – usually a loss – or lose all of their payments to date. This further depresses prices. The next few years may be a good time to pick up a coastal property at a discount, but do not speculate with off-plan property unless you are desirous of losing money.

People thinking of buying to let should also proceed with caution. With so many off-plan investors finding it impossible to sell on, those who can afford to complete do so in the hope of renting out their property until the market picks up. Many of the people who have bought holiday homes also try to let them out when not using them. This means that the coastal rental market is now saturated, at a time when hotel capacity has also been increasing. Consequently, occupancy rates and yields are falling, and only the most suitable rental properties have any chance of bringing in a respectable income. Estate agent’s rental claims should be treated with great scepticism and you should always talk to an independent rental agency before you buy to let. Until the market improves, which may be some time, do not make optimistic rental income assumptions when calculating how much you can afford to borrow, and bear in mind that rental management fees and taxes are likely to eat up more than 50% of any rental income you achieve.