This is an interim report intended to give potential buyers and sellers of Spanish property a snapshot of the current state of the Spanish property market, from an independent, unbiased point of view. To this end it reviews the Spanish government’s latest figures on the performance of the Spanish real estate market, and contrasts these with observations from Spanish property professionals and other individuals currently involved in the market.
Overview of the Spanish property market
According to the Spanish government’s latest figures, Spanish property price inflation is still robust at 9.8% over 12 months to the end of September. However, it also appears that the Spanish property market is also gradually cooling, and price increases are slowing down. All this according to the Spanish government’s figures.
In contrast to the government’s figures, many Spanish property professionals working in areas popular with foreign buyers – principally the costas – report a different picture. Spanish estate agents, developers, and lawyers report that that the overall market is slow or stagnant, and that there is an excess of supply over demand. Properties are taking longer than ever to sell, and cash buyers in a position to complete quickly can negotiate significant discounts of 20 – 30% off asking prices. For most types of Spanish property, in most parts of Spain, it is a buyer’s market.
And then there is the gargantuan construction boom currently underway in Spain. Housing starts are at all time highs, and the supply of new properties flooding onto the market is bound to move the market’s equilibrium. With so many new properties coming onto the market, it is reasonable to expect prices to stabilise or fall, assuming new demand does not emerge up from some unexpected quarter.
The Spanish government’s latest figures on the property market
Official figures from the Spanish Ministry of Housing show average Spanish property prices rising by 9.8% per year in nominal terms (6.9% in real terms) over 12 months to the end of September. This is a respectable gain, but this is also the first time since the 2nd quarter of 2001 that average Spanish property price inflation has fallen below 10%, and the trend is clearly towards falling property price inflation. Annualised quarterly increases have been declining from a high of 18.4% in the 1st quarter of 2004, and this is the 7th consecutive quarterly fall in Spanish property price inflation. Many analysts expect Spanish property price inflation to continue falling over the next year to around the inflation rate, which would mean nominal annual price increases of around 3 to 4%, and no real price increases.
As ever, the average national figure disguises significant regional variations in Spanish property price changes. By 12-month gains, the best performing province was Lugo, in Galicia, where prices increased by 31%, followed by Cordoba, in Andalusia, where properties finished the period 17.5% more expensive on average than a year before. The best performing autonomous regions were Cantabria, on Spain’s north coast, where prices went up by 18%, and Aragon, also in the north, where prices went up by 14.5%.
Over the last 12 months the worst performing provinces were Alava (Basque Country), where prices are only up 3% in 12 months, and Alicante (Valencian Community), up only 4.4%. Most of the regions popular with English-speaking buyers, for instance Malaga on the Costa del Sol, The Canaries, and Murcia, were close to or below the national average of 9.8%.
Spanish property professionals feedback
On the whole, Spanish property professionals working in areas popular with English-speaking buyers have little to celebrate at the moment.
In most areas demand is feeble at current prices, and vendors have resisted dropping prices to the level at which demand comes to life.
In areas with a lot of new construction, there is a glut of mediocre-quality, 2-bedroom apartments in mediocre locations that off-plan investors and developers are having trouble selling. This situation is dragging down the whole market in areas like the Costa del Sol and the Costa Blanca.
Illegal building, corruption scandals, and notoriously poor professional standards amongst agents and developers are also helping to depress demand by putting off potential buyers.
Some areas, such as Marbella, are in crisis, but even so it appears that vendors and developers haven’t yet come to terms with the situation, and are still resisting dropping prices. As a consequence the market is very quiet, and properties aren’t selling. Chances are that the situation will get worse, until vendors come to terms with reality, and drop prices significantly.
The good news is that there seems to be a price floor some 20 to 30% below currently asking prices at which demand springs to life.
Having said that, not all areas and market segments are in the same boat.
Super-luxury properties with prices tags in the millions in luxury enclaves of the Costa del Sol, Costa Brava, and Mallorca are seem to be doing better than the overall market, as the international super-rich set looking for luxury properties around the world are richer than ever.
Good quality property in great locations, and on the best developments, still sells well if vendors are prepared to accept reasonable offers.
Developers are struggling in this market, with tough competition from investors trying to dump their off-plan investments, and many homebuyers now wary of buying off-plan. However, the best new developments are still popular, as buyers become better informed and look for quality.
The market is still firm in attractive areas where there is little new construction, for instance Tarifa or the Ebro River Valley, and the Balearics. In the Canaries, however, the market is weak.
Interest rates and Spanish Property: Eurozone interest rates were raised in October to 3.25%, pushing up Euribor – the rate used to calculate interest payments for most mortgages in Spain – and thus the cost of buying property in Spain. The latest increase in Euribor will add around 1,200 Euros onto annual payments for a typical mortgage of around 140,000 Euros at 26 years. Mortgage interest rates have now increased by 84% since June 2005. Increasing interest rates will reduce demand for Spanish property by increasing the financing costs of buying Spanish property.
Spanish Housing starts: There were 167,662 housing starts in Spain in the 2nd quarter of 2006, 4.3% higher than the same period in 2005. In the first 6 months of 2006 there have been 323,000 new properties started in Spain, which means 2006 is set to be a record year for housing starts, with well over 600,000 new properties started in the year. With the market already slowing down, and supply below demand in many areas, this flood of new properties could destabilise the market, and put downward pressure on prices.
Spanish property market conclusions
With the exception of some niche areas and segments, the Spanish property market looks overvalued, and a wave of new properties coming onto the market will exacerbate the problem. Vendors in coastal areas popular with English-speakers are just starting to accept that they cannot achieve their asking prices, and have to consider offers. This trend looks set to continue in 2007.
© Mark Stucklin (Spanish Property Insight)
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