The shares of property companies quoted on the Madrid stock exchange rose by more than 60% in 2006. In theory stock valuations are forward looking, which means the stock market is (wildly) optimistic about the future of the Spanish property market. I must confess that I don’t share this enthusiasm, at least not in the short term. But I am optimistic about the best quality property and developments in Spain, which I think will benefit from a flight to quality as the market dips. The way that English-speaking buyers are starting to wise up, quality is bound to be the key attribute in future, and to this end I’m preparing a guide to the best residential developments in Spain (first version ready end of January), to help ‘ordinary punters’ identify quality, and benefit from what I observe as a property specialist on my regular field trips around Spain.
2007 is going to be a buyer’s market. If you are hoping to buy, go for quality. If you are hoping to sell, lower your price expectations. And if you just own property in Spain, then brace yourself for higher utility bills (though still low by EU standards), oh, and enjoy!
All the best for 2007.
SPANISH PROPERTY NEWS
A new report by the Institute for Public Policy Research envisages that as many as 3.3 million pensioners might move abroad by the middle of the century. This would be a threefold increase in the 1 million or so British pensioner already living overseas.
All in all, an estimated 5.5 million British people live permanently abroad – almost 10% of the UK population. During 2005, some 2,000 Brits left the country for good every week. “If current trends continue, we could expect as many as a million more British nationals to emigrate over the next 5 years” the report’s authors write.
Australia is the most popular overseas destination, with 1.3 million Brits now living down under. Spain is the second most popular destination, with 761,000 British emigrants.
Within Europe, Spain is the most popular destination by a wide margin. Ireland is next, with 291,000, ahead of France with 200,000. Other popular European ‘quality of life’ destinations are Cyprus (59,000), Portugal (38,000), Turkey (34,000), Italy (26,000), and Greece (18,000). Bulgaria has a paltry 800 British residents, though this rises to 10,000 when you include part time residents.
Including part time residents, there are 990,000 Brits in Spain, 74,636 of whom are pensioners. By age group, 39.4% are in the 45-64 years of age bracket, and 24.7% are 25-44 years old. To date, only 21.5% are 65 or above.
These figures show that, when it comes to attracting Brits, Spain continues to enjoy a thumping lead over the European competition. France is Spain’s biggest ‘quality of life’ competitor, but almost four times as many Brits choose to live (and buy property) in Spain than in France. In terms of popularity, all other European destinations are almost insignificant in comparison to Spain.
As the number of Brits abandoning the UK in favour of a better quality of life abroad increases, Spain will continue to be the top European destination, and may even increase its lead over competitive destinations. Spain’s reputation has taken a hit recently because of illegal building scandals, corruption scandals, and the scandalous behaviour of some large property sales organisations, all of which have combined to undermine buyer confidence in Spain. But these problems will be sorted out, and schemes will emerge to help Brits buy with total security in Spain. Once this has happened, there will be nowhere that can compete with Spain’s quality of life, whilst only being a couple of hours by plane from the UK.
Spanish mortgages have ended the year the way they started – getting dearer. Euribor – the rate used to calculate interest payments for most mortgages in Spain – rose to 3.92% in December (to be confirmed by the BoS), the highest level since 2002. By Friday 29 December – the last trading day before the New Year – Euribor had broken through the 4% barrier to reach 4.028%. Euribor has risen by 39% in 2006, and 87% in the year and a half since June 2005.
The latest rise will increase the pressure on homeowners with mortgages in Spain. Spanish mortgage repayments for an average variable-rate mortgage of 145,300 Euros at 25 years, with an interest rate of Euribor plus 0.5%, will increase by around 1,100 Euros per year, or 91 Euros per month.
Euribor rates are derived from the Eurozone base rate set by the European Central Bank (ECB). As expected, the ECB raised base rates in December from 3.25% to 3.5%. This is the sixth time the ECB has raised base rates in a year, and the highest level since September 2001. The ECB is expected to continue raising interest rates in 2007, though the recent strength of the Euro against the Dollar, and the fall in the price of oil, may cause the bank to postpone further increases in Eurozone interest rates.
Gregorio Mayayo, the president of the Spanish Mortgage Association (AHE), expects Spanish mortgage interest rates to continue increasing in 2007, but not as much as in 2006. He expects borrowers to cope “reasonably well” with higher payments, and only sees serious problems occurring if the economy stalls, and unemployment goes up.
Meanwhile, the number of mortgage defaults in Spain is on the increase, albeit from a very low base. In a recent report the Bank of Spain says, “ Although the default ratio is low, it should be pointed out that bad debts are increasing, in some cases at a high rate.”
Spanish property now takes four times longer to sell than in 2005
A recent article in the Spanish financial daily “Expansion” reveals that Spanish properties are now taking on average more than 2 years to sell, compared to 6 months at the start of 2005. In coastal areas, average sales times increase to 3 years. According to the article, vendors of resale properties are having to reduce their prices by an average of 18,000 Euros.
Foreign investment in Spanish property continues to fall
New figures from the Bank of Spain (BoS) show that foreign investment in Spanish property has fallen for the 3rd year running. Foreigners spent 3,5 billion Euros on Spanish property in the first 9 months of this year, down 14.3% on the same period last year. Spanish investments in foreign property almost doubled in the same period.
Spanish stock returns have stuffed Spanish property returns this year, according to an article in the Spanish daily ‘La Vanguardia’. Spain’s main stock market index – the Ibex – is up by 30% this year, compared to an average property price increase of just under 10%. The shares of property companies traded on the stock market did best of all, up by 66.45% in the year.
Property investors could have earned a bundle, and saved themselves a huge amount of hassle by simply investing in a basket of Spanish property company stocks. Investing in companies that invest in property takes away much of the pain of property investing. Shares don’t cost anything to maintain, they don’t have leaky roofs or blocked drains, they don’t have troublesome tenants, and they are traded on a large, liquid market so you can sell when you want to.
According to the latest figures from the Spanish government there were 674,629 new residential construction projects in the first 9 months of the year, 24% more than during the same period in 2005. This is set to be a record year for housing starts in Spain.
But all booms come to an end sooner or later. According to a recent article in the Spanish daily ‘El Mundo’, José Luis Miguel – president of the Valencian property trade fair ‘Urbe Desarrollo’ – expects Spain’s residential construction boom to end in the next 2 years. He forecasts housing starts to halve to around 450,000 per year in 2008, down from over 800,000 at present. “Demand will fall gradually to a structural level where people only buy to meet their housing needs,” Miguel is quoted as saying. With interest rates rising, investment demand falling, the job market wobbling, and baby-boomers already owning homes, it looks like the factors driving the present construction boom could disappear. “The adjustment will take place in 2 years, and prices will continue to moderate, falling to general inflation levels,” says Miguel.
According to a recent article in the Spanish daily ‘ABC’ the European trade organisation ‘Euroconstruct’ also expects Spain’s construction boom to end in 2008, when it forecasts housing starts to fall for the first time in 12 years. But in contrast to Miguel, who expects a dramatic fall of 50%, Euroconstruct forecasts a very modest fall of only 2.5%.
The Spanish daily ‘La Vanguardia’ reports on figures from Spain’s Technical Institute of Construction (ITEC), which forecast housing starts of 815,000 this year, smashing last year’s all time record of 730,000.
According to Josep Ramon Fontana – a director of ITEC – new regulations on building standards in Spain partly explain the surge in housing starts this year. The new regulations, introduced in October, tighten up standards for structural security, construction materials, and thermal and acoustic insulation, and require that all Spanish new developments include solar panels. The regulations are expected to increase residential construction costs in Spain by 10% to 15%, so many promoters are thought to have brought forward their projects to avoid the new regulations.
Fontana also thinks that Spanish promoters are rushing to take advantage of Spain’s real estate boom before it peaks. “Promoters are not behaving prudently in the light of evidence of a down turn in demand. On the contrary, they appear to be placing a risky bet on there being one last train,” Fontana is quoted as saying.
Also quoted in the article is Anton Checa – director general of ITEC. “There is a slow down in demand, which means that t sock of properties is building up that is hard to sell, a situation that is typical of the end of a boom.”
Spain leads in properties per capita
A recent article in the Spanish daily “ABC” points out that Spain has the highest ratio of properties per capita in all of Europe (data taken from recent report by FUNCAS entitled “Papeles de Economia”). There are 509.8 properties per 1,000 people in Spain, or just over 1 property for every 2 people. The next highest is Portugal, with 489 properties per 1,000 people, and the European average is 468.4 properties per 1,000 people. It seems that Southern European countries with pleasant climates and attractive coastlines, such as Spain and Portugal, have more properties per capita than Northern European countries, where there are fewer second homes.
Number of properties in Spain not excessive
The ratio of properties to households in Spain is at a reasonable level, according to the latest quarterly report on the Spanish economy by Caixa Catalunya – one of Spain’s biggest savings banks.
Between 1998 and 2005, 3.5 million new properties were built in Spain, whilst the number of new households formed during the same period was 2.7 million. This means that there were 800,000 more properties built than households created in the period, an excess of approximately 100,000 properties per year. But according to the report the difference between housing starts and new household formation is not excessive if one takes into account the objects of other types of demand, such as holiday homes and investments.
The recent growth in the number of households in Spain (driven by rising divorce rates, single person households, and immigration) means that the ratio of properties to households in Spain has actually fallen over the period, from 1.542 properties per household in 1998, to 1.494 in 2005. The greater increase in households compared to properties enables the bank to conclude that residential construction levels in Spain reflect genuine demand, and have a sold base in demographics.
Savings banks warn of over supply of Spanish property
Whilst Caixa Catalunya argued that the supply and demand for Spanish property is more or less in balance by historical standards (see news above), the Spanish Confederation of Savings Banks (CECA) was warning of a growing disconnection between supply and demand for Spanish property.
This concern was raised by Juan Ramón Quintás – President of CECA – in a recent presentation. He pointed out that whilst Spanish promoters are building at record levels, savings banks are noticing a significant fall in demand. Savings banks are the biggest mortgage lenders, and have an enormous stake in the health of the Spanish property market.
Although supply and demand have recently grown out of kilter, Quintás expects some equilibrium to start returning to the market in 2007, when housing starts should start falling in response to cooling demand, and prices start falling towards the 5% mark.
If the gap between supply and demand for Spanish property continues for too long, the risks of a hard landing increases, which could have “an impact on employment and Spain’s economic growth.”
Also in December the Spanish Ministry of Finance, run by Pedro Solbes, noted a change in demand. In its December report entitled “Synthesis of Economic Indicators” the department notes that cooling property prices anticipate a possible fall in demand for residential Spanish property.
Wall Street Journal bearish on Spain
In a December article the Wall Street Journal – a prestigious US financial daily – strikes a bearish note on the Spanish economy and housing market.
Without denying that the Spanish economy is growing fast, the article argues that Spain’s booming property market is hiding some serious economic problems that the Spanish government has done little to resolve.
Spain’s construction boom will result in 800,000 odd housing starts this year, almost double the level of France, a country with 17 million more inhabitants. Many of Spain’s new properties are bought as investments, rather than homes, and the market has been distorted by rampant corruption in town halls.
The article asks how long this construction boom can last, and how it might end.
Many of Spain’s banks are selling their share holdings in the country’s biggest developers and builders, which suggests that the banks expect the boom to end sooner rather than later.
The article argues that a correction in the Spanish property market will have a big impact on the wider economy, which depends upon the real estate sector for an too much of its growth. Construction drives 10.4% of Spanish GDP, double the Eurozone average.
Spain’s economy could be in for some difficult years. Over dependence on construction is bad for productivity, which reduces Spain’s ability successfully in a globalised economy. And if the property sector cools, the job market will struggle to absorb laid off construction sector workers.
The article concludes that unless the Spanish government takes urgent steps to diversify Spain’s economy, reduce bureaucracy, and liberalise both the job market and the energy market, the economic bonanza of recent years could soon be replaced by the mediocrity of Spain’s historical economic performance.
Abusive clauses common in property sale contracts
The Spanish Confederation of Consumers and Users (CECU) – a consumer protection group – reveals that a typical property sale contract contains an average of just under 5 abusive clauses. Of all the contracts examined by CECU, only one was deemed to be free of abusive clauses.
The most common abusive clauses found were as follows:
- Forcing buyers to pay the vendor’s registration costs
- Forcing buyers to take over the vendor’s mortgage, or pay the mortgage cancellation costs
- Failing to provide precise dates for completion
- Enabling developers to make changes to a property before completion
- Stating that developers and builders are not responsible for any construction flaws
- Forcing buyers to accept the vendor’s choice of notary
- Forcing buyers to pay the costs of installing a connection to the mains (water, electricity)
CECU also finds that buyers in Spain are generally unaware of their consumer rights, and how best to pursue a complaint.
OECD expects modest correction in Spanish property prices
The OECD – a Paris-based club of rich economies – envisages a modest correction in Spanish property prices, but not one that will pose a serious risk to the Spanish economy. The Spanish property sector needs to cool down in the opinion of Jean-Phillippe Cotis -the OECD’s chief economist.
37% of Spanish properties purchased as an investment
A recent study of Spanish home buyers directed by Prof. José García-Montalvo of Pompeu Fabra University reveals that 37.2% of Spanish property buyers admit that either they, or a member of their family, have bought Spanish property in the last 5 years exclusively for financial gain. The study, reported in the Spanish daily “El Periódico de Catalunya”, shows that Spanish investors expect property values in Spain to increase by an average of 23.4% over the next 10 years. The greatest proportion of property buyers who plan to sell on their property investments are in Murcia (45%), Valencia (39%), Barcelona (38%), and Madrid (33%).
Spanish utility charges to rise in 2007
The Spanish government has authorised an increase in domestic utility prices for 2007. As of 1 January domestic electricity prices will increase by 2.8%, telephone line rental charges by 2%, and household gas prices by 2.2%. These increases will not change the fact that Spain has some of the lowest utility charges in the EU.
© Mark Stucklin (Spanish Property Insight)