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April 2006 news review

Travel around Spain today and it’s obvious that there’s a construction boom in full swing. The rate at which Spain is turning out new properties is alarming. The ratio of properties per 1,000 people is already the highest in Europe, so it’s not as if Spain needs to beef up its housing stock to converge with the European average. And despite having the highest number of properties per capita in Europe, Spain is also building more new properties than any other country in Europe, around 800,000 housing starts per year, equivalent to the combined number of housing starts in Germany, France and the UK. I don’t know what happens to all these properties once they are built, but I doubt that they all get sold. For stability and the much prayed for ‘soft landing’ we can only hope that the number of housing starts in Spain slows down dramatically, and soon. For the time being, though, there isn’t much evidence of that happening.



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The wrecking ball WILL swing in Marbella
The President of Andalusia – Manuel Chaves – has reiterated his administration’s intention to demolish projects in the municipality of Marbella that have been illegally built on land reserved for public installations or green areas. If the regional government of Andalusia were to go through with this, it could affect some 60 of the 300 projects currently under judicial review. However, it is unlikely that the decision to demolish any illegally built properties will be taken before Marbella’s municipal elections in 2007.

Average Spanish property prices up by 12% in 12 months
The latest quarterly figures from the Spanish government show that average Spanish property prices rose by 12% over 12 months to the end of March. Prices rose all over Spain, but especially on Spain’s Mediterranean coast. A full report on these latest quarterly figures will be included in our next monthly news bulletin.

Euribor passes 3.2%, Spanish mortgages get dearer
Euribor – the interest rate most commonly used to calculate mortgage repayments in Spain – rose for the 7th consecutive month in April, pushing up variable-rate Spanish mortgage repayments. Euribor rose to 3.318% by the end of April, up from 3.233% at the end of March. Spanish mortgage lenders often use the previous month’s average Euribor rate to calculate mortgage repayments. The Euribor average for April was 3.2178%, though this figure still needs to be confirmed by the Bank of Spain before mortgage lenders can start using it to determine mortgage payments. Euribor is now at its highest level since September 2002, and the financial markets expect it to rise to 3.75% at the end of 2006, and 4% by April 2007.

Euribor is calculated using the European Central Bank’s (ECB) base rate. The ECB surprised the markets by leaving the Euro-zone base rate unchanged at 2.5% in April. The markets had been expecting a 0.25% increase from 2.5% to 2.75%. Nevertheless, Jean Claude Trichet, President of the ECB, has made it clear that we should expect rate tightening to continue for the time being, despite this temporary pause in April. Despite the recent increase in the base rate, Nicolás Garganas – one of the bank’s board members – described the present low level of base rates as “far from normal”. The next opportunity to increase base rates will be at the beginning of June 2006.

IMF points out risks of property bubble to Spanish economy
The International Monetary Fund (IMF), in it’s biannual report on the status of the world economy (World Economic Outlook April 2006), has once again voiced its concerns about the high level of property prices and property inflation in Spain. The Fund argues that property prices in Spain have risen more than is justified by economic fundamentals such as growth in income, population and interest rates. The implication, therefore, is that Spanish property prices increases have been driven, to some extent, by speculative investment that might lead to the emergence of a property bubble. Nevertheless, the Fund also forecasts healthy economic growth of 3.3% this year for Spain (and 3.2% in 2007), well above the EU average.

Also in April: Jaime Caruana – Governor of the Bank of Spain – suggested reforming Spain’s land laws to reduce the pressure on property prices caused by speculation with development land. Caruana also noted that, for the time being, Spanish households are still not struggling to meet their mortgage repayments, despite the recent increases in Euribor. Spain’s Foundation of Savings Banks (Funcas) has forecast that Spanish property price inflation will decline gradually, and that there will be no ‘hard landing’ in the absence of a serious external shock leading to an enormous increase in interest rates. Analistas Financieros Internacionales (AFI), for its part, states that the property-related risks to the economy are moderate, whilst expecting property prices to continue increasing due to strong demand.

Madrid and Barcelona fail to shine in new quality of life ranking
A new ranking of quality of life in 215 world cities by Mercer HR Consulting puts Barcelona in 44th place, and Madrid in 45th place, behind other European cities like Brussels, Berlin, Dublin, Paris and London. The Swiss cities of Zurich and Geneva are at the top of the ranking. “Why, then, does everyone I know who lives in Zurich want to move to Barcelona?” muses Mark Stucklin of spanishpropertyinsight.com.

Slowdown in Spanish real estate sector will reduce growth and employment
The forecast slowdown in the Spanish real estate sector is expected to reduce Spanish economic growth by 1.3%, and employment by 2% (365,000 jobs) from the 2nd quarter of 2007, according to a new report by AFI, commissioned by Madrid’s Association of Property Developers (Asprima). After several years of spectacular growth, the Spanish property sector will have to adjust to a more subdued environment in the coming years. The report forecasts that housing starts will fall from 715,000 in 2005 to 648,000 in 2006 and 588,000 in 2007. The number of principal homes built will fall from 490,000 last year to 400,000 in 2007, and the number of holiday homes will fall by 18.6% from 225,000 to 183,200.

Elsewhere in April, the Worldwatch Institute warned that the present model of Spanish real estate development is unsustainable, and needs to be changed. The Institute points out that, despite having the highest ratio of properties per head in Europe, Spain also builds far more than any other country in Europe – around 800,000 new home every year – the same as Germany, France and the UK together. Between 1990 and 2000, the Spanish land area dedicated to residential, commercial or industrial use rose by 26%.

Spanish properties taking longer to sell, prices under pressure
Spanish real estate professionals reveal that apartments are now taking 32 months on average to sell, and that owners looking to reduce this time are having to slash their asking prices by 30,000 Euros.

Wave of ‘for sale’ signs hit the Spanish coast
The Spanish daily ‘La Vanguardia’ reports that urbanisations on the Spanish coast are filling up with ‘for sale’ signs, and that a reduction in the number of investors has undermined the sales of new developments. According to the paper, the average time to sell for apartments is now more than 3 years, causing serious problems for speculative investors needing to sell before completion. La Vanguardia quotes Emilio Langue – director of residential property at the consultancy Aguirre Newman – as saying that “investors have practically disappeared from the coast”, and that the only buyers now are people looking for a home or holiday home for personal use.

Spanish government to introduce mandatory qualifications for real estate agents
“It’s easier to sell properties than lettuces in Spain, and this can’t continue”. With these words the Spanish housing minister – Maria Antonia Trujillo – has announced plans to regulate the estate agency business in Spain. Once the new laws have been introduced, only people with an official qualification will be legally entitled to sell property in Spain, and all brokers will have to take out professional indemnity insurance.

Spanish Bank recommends delaying property purchase
According to a recent article in the Spanish financial daily ‘Expansion’, Jordi Gual – director of research at the Spanish savings bank La Caixa – has recommended waiting 3 or 4 years before buying a property in Spain. Gual basis this suggestion on his expectation that real Spanish property prices, after adjusting for inflation, could fall in the next few years.

Moratorium on new estate agents in Sitges
With 70 estate agents already existing in Sitges, the town hall has declared that no more licences to open an estate agency in Sitges will be granted in the next year.

Foreign investment in Spanish real estate falls in 2005
The latest figures from the Bank of Spain reveal that foreign investment in Spanish real estate fell by 16.7% to 5,538 million Euros in 2005. Foreign investment in Spanish property has now declined for 2 years in a row.

Leading bank reveals that mortgage business is slowing down
BBVA – one of Spain’s largest banks – has confirmed that the rate of growth in its Spanish mortgage business is slowing down. According to Ignacio Goirigolzarri – one of the bank’s directors – “BBVA’s mortgage business continues at a healthy pace, but is slowing down in Spain”.

Spanish mortgage default levels down to 0.37% in December<br> The percentage of mortgage defaults fell to 0.37% in December 2005, according to the Spanish Mortgage Association (AHE). Evidently, then, the vast majority of Spanish mortgage borrowers can still pay their mortgages, despite the recent increase in mortgage interest rates.

© Mark Stucklin (Spanish Property Insight)


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