THE GOVERNMENT
The Spanish Ministry of Housing’s official figures show that property prices increased by a national average of 12.8% during 2005, taking the average cost of residential property in Spain to 1,824 Euros per square metre, up from 1,618 Euros/ m2 at the end of 2004. This was the lowest rate of Spanish property price inflation since 2001.

The average figures, however, conceal considerable regional differences. For example property prices rose by 20.6% in Ciudad Real (Castilla La Mancha), whilst falling by 0.4% in Teruel (Aragon).

On the whole, and for the first time in many years, inland properties and properties on the north west coast (Galicia) did better than properties on the Mediterranean coast and Islands.

Rafael Pacheco – Director General of Architecture and Housing for the Spanish government – has described the 12.8% increase in Spanish property prices during 2005 as “encouraging”, as it demonstrates a clear trend towards lower property price inflation. According to Pacheco the evidence that Spanish property inflation is moving towards “more reasonable” levels is “undeniable”.

Spanish Property Price Inflation

YEAR	PROPERTY INFLATION
1996	0.2%
1997	1.2%
1998	7.7%
1999	9.6%
2000	7.7%
2001	11.1%
2002	17.3%
2003	18.5%
2004	17.2%
2005	12.8%

The government expects that Spanish property inflation will continue to decline throughout 2006 and subsequent years. Pacheco states that the government’s goal is to bring Spanish real estate inflation in line with consumer price inflation, which stood at 4.2% in January 2006, up from 3.7% in December 2005. One can only assume that the government also plans to bring down consumer price inflation to average Euro-zone levels.

You can see the latest nationwide Spanish property figures from the government here

SOCIEDAD DE TASACIÓN
According to the latest report from Sociedad de Tasación – one of Spain’s biggest appraisal companies – prices for newly built property rose by 10.1% during 2005, compared to 10.7% in 2004. In coastal districts, newly built property price inflation fell from 13.5% in 2004 to 11.8% in 2005. Property inflation in popular tourist destinations on the Costa del Sol was markedly down, with inflation in Malaga, Marbella and Torremolinos falling by half from 20.2%, 15.1% and 21.2% to 11.5%, 9.5% and 11.9% respectively.

Looking to 2006, Sociedad de Tasación expects that Spanish property will continue to deliver higher returns than government bonds, with less volatility (risk) than the stock market. On the other hand, lower economic growth, inflation and higher interest rates will squeeze disposable household income in Spain. This tendency, along with the existing high level of Spanish real estate prices, is expected to dampen demand for Spanish property. Overall, therefore, the company expects the Spanish property market to grow at a slower rate in 2006, with properties taking longer to sell.

The company forecasts property price increases of between 5 and 10% for almost all regions, with the exception of Pontevedra (Galicia), where real estate prices are expected to increase by more than 10%, and Cadiz, Malaga, Tarragona, Girona and Huesca (Aragon), where property prices are expected to stagnate or fall.

BBVA
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 inflation will fall to 5% – 6% in 2006, down from 12.8% in 2005, with the biggest fall in growth rates taking place in the resale market (as opposed to new build).

LA CAIXA
La Caixa is Spain’s biggest saving’s bank, and has the largest branch network in Spain. La Caixa forecasts that Spanish real estate prices will grown by less than 10% in 2006, and that demand will decline slightly to between 400,000 and 500,000 properties. On the other hand the bank is quick to say that it sees little risk of an abrupt price correction or ‘hard landing’ for the Spanish property market.

METROVACESA
Average mortgage interest rates rising to 3.5% in 2006, up from an average of 3.2% in 2005. Housing starts will fall to 700,000 units, from 720,000 in 2005, but the number of completed new properties will rise from 535,000 in 2005 to 600,000 in 2006. The number of property transactions (sales) is expected to rise from 900,000 in 2005 to 950,000 in 2006, and prices are forecast to rise by between 7.5% and 15%

CB RICHARD ELLIS
According to a recent report (Indicadores de mercado: Precios españoles) by CB Richard Ellis – a real estate consultancy – Spanish new build property prices rose by 16.7% in 2005, whilst the average size of property in Spain fell 5% from 105.3 m2 in 2004 to 99.9 m2 in 2005. CB Richard Ellis expects Spanish property price inflation to moderate in 2006.

DON PISO
Don Piso is one of the largest chains of estate agencies in Spain. They forecast that Spanish property inflation of below 10% in 2006, whilst stressing that in real terms, prices will continue to rise.

ASSOCIATION OF PROMOTERS AND CONSTRUCTORS OF SPAIN (APCE)
This trade association of the Spanish real estate sector forecast that demand for property in Spain will fall by between 5% and 9% in 2006, to around 475,000 properties. Approved residential building permits are forecast to fall 5% to 10% in 2006, down from the 781,587 approved in 2005, and prices are expected to continue increasing, but by less than 10% in 2006.

Comparison of Positions

ORGANISATION	FORECAST
Spanish Government	Lower property inflation
Sociedad de Tasación	5% to 10%
BBVA	5% to 6%
La Caixa	< 10%
Metrovacesa	7.5% to 15%
CB Richard Ellis	Lower property inflation
Don Piso	< 10%
APCE	< 10%
Official average property price increase in 2004	12.8%

OTHER SOURCES OF OPINION
A recent report co-written by the University of Barcelona (UB) and Forcadell – a Spanish real estate consultancy – forecasts that Spanish property prices could fall by as much as 20% between the 2007 and 2009. This fall will be triggered by a weaker Spanish economy, too much new property, and falling demand as speculators and investors tap other countries in search of high returns. According to Prof. Gonzalo Bernardos, 2005 will turn out to be a bridge year between the bull and bear market, with 2006 bringing the first signs of falling prices, a trend that will strengthen in 2007 when the Spanish real estate market will suffer a “hard landing”.

Jaime Caruana – the Governor of the Bank of Spain – has once again warned that Spanish property is over priced by between 24% and 35%. However in the same breath he adds that he does not expect prices to fall, though sustained high levels of property price inflation in Spain does increase the risk of an abrupt price adjustment sometime in the future.

The European Central Bank (ECB) has also expressed concern on several occasions in recent months that ‘certain’ Euro-zone property markets might be overheating. It is no secret that the Spanish property market is the one that keeps Jean Claude Trichet – Governor of the Bank – awake at night with worry. One feature of the Spanish property market that particularly bothers the economists at the ECB is the fact that over 80% of Spanish mortgages are variable rate mortgages, which turn interest rates increases straight into higher mortgage repayments. This leaves the Spanish property market more exposed to interest rate increases than, say, the German market, where the majority of mortgages have at least a term of fixed interest rates. The ECB believes that Euro-zone property prices could be overvalued by between 15-25%, with Spain at the higher end of the scale. Spain’s annual property inflation is significantly above the EU average of around 7.5%

The Royal Institution of Chartered Surveyors in Spain (RICS España) also has an opinion on the present level of real estate prices in Spain. Stan Dickens – President of RICS España, was recently quoted in the Spanish press as saying, “Very few people in Spain are prepared to admit that property prices might fall, despite increasingly clear signs to the contrary”.

Let’s not forget the public – the people who actually buy Spanish property. It turns out that 84% of Spaniards surveyed in an online poll by Spain’s La Vanguardia newspaper believe there is a bubble in Spain’s real estate market.

The following table gathers recent estimates of the extent to which Spanish property might be overvalued.

ORGANISATION	% ABOVE ‘CORRECT’ VALUE
BBVA	28%
FUNCAS	30%
The Economist Magazine	30-52%
Bank of Spain	24-35%
PriceWaterhouseCoopers	20-30%
OECD	35-45%
ECB	15-25%

CONCLUSION
Some commentators agree with the Spanish government that the property market will glide towards a soft landing in 2006 and 2007. However, one should bear in mind that many of the organisations, like the Government, who make these forecasts also have a strong vested interest in the forecast turning out correct, which makes them unlikely to forecast anything else. A hard landing or ‘bursting bubble’ scenario in the Spanish property market would cause serious problems in a country like Spain, where the economy is more exposed to the real estate sector than in almost any other industrialised country. Even organisations such as BBVA, FUNCAS, and the Bank of Spain, who suggest that Spanish property is over valued, always rush to add that they do not believe that prices will fall in a sharp correction, but rather that real property prices will slowly give up some of their value to general inflation over a period of years.

Other organisations, such as The Economist Magazine, are more bearish, and warn of an abrupt correction in the Spanish property market.

As always, nobody knows how things will turn out, and all you can do is place your bets on the future, given the little information you have.

At the beginning of 2005 I gave the following advice to people thinking of buying property in Spain:

“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.”

I would give the same advice now, at the beginning of 2006. However I have to confess that I lean towards the bearish camp in my outlook for the Spanish property market in the short to medium term. I expect prices for some types of property, in some areas, to fall in 2006 and 2007. So I think that buyers who are in no hurry, and who are looking for ‘plain vanilla’ type properties on the Spanish coast, may benefit from lower prices if they wait a year or so before purchasing. But as always, it depends upon what you want to buy and where.

© Mark Stucklin (Spanish Property Insight)