If the Spanish property business could sell bad news it would be sitting on a gold mine. Property news these days from Spain is dominated by corruption scandals, illegal building, demolition threats, land grabs, property bubbles, dodgy developers, and unscrupulous agents, all of which turn buyers off. There is no point in trying to deny the bad news, even if some of it is an exaggeration. The truth is that the Spanish property sector is rotten in places, largely because the recent boom offered easy money in a poorly regulated environment, which encouraged bad practises. But the bad news is only part of the story. Get your purchase right, and Spain is a fabulous country to own a home, as the majority of people discover for themselves. The trick is to deal only with decent, professional companies and individuals when you buy. I realise this is easier said than done, as it can be difficult to get the information you need to make an informed decision, and all companies claim as their own the very highest standards. So I’m doing my bit to make the market more transparent in this respect, by publishing my guide to quality developments in Spain (see below). I hope you find it useful if you are thinking of buying in Spain.
SPANISH PROPERTY NEWS
In its latest report on Spain, the OECD – a Paris-based club of rich economies – has warned that property prices in Spain are 30% over valued, and that Spain runs the risk of a sharp property price correction with serious consequences for economic growth.
“Analysis of the data indicates that Spanish property prices are 30% above their long term equilibrium,” says the report.
The OECD argues that the most likely scenario is a gradual moderation in Spanish property prices, but does not rule out serious economic problems if rising interest rates, falling demand, falling prices and a construction sector recession all happen at once.
The report points out that the Spanish property boom has lead to high levels of household indebtedness, and that real property prices have doubled since 1998, pricing first time buyers out of the market. To deflate Spain’s property bubble the OECD recommends a gradual phasing out of the tax breaks that encourage buying over renting.
Robert Shiller – the Yale University professor who saw the late 90s dotcom bubble for what it was – has also commented on Spain’s real estate bubble. Shiller is quoted in the Spanish daily ‘La Vanguardia’ as saying that “expectations of price increases appear to be driving the property market,” – almost the definition of a bubble. However, ‘La Vanguardia’ also quotes a US university rector familiar with the Spanish property market well as saying “experience shows that Spaniards keep buying property no matter how many times you publish these figures.”
Average national Spanish property prices rose by 9.1% in 2006, according to the figures just released by the Spanish government. This is a significant drop from the 12.8% clocked up in 2005, and the 3rd consecutive year in which the rate of Spanish property inflation has fallen, confirming a trend towards a cooler Spanish property market. A full review of the Spanish property market’s performance in 2006, and the outlook for 2007 will be included in the next bulletin at the end of February.
Meantime, the price guides published by leading property portal www.kyero.com show that the average asking price of property in the regions covered by Kyero.com fell 1.6% to 240,410 Euros at the end of January. Average property prices by size are as follows: 1-bed (€145,000), 2-bed (€200,000), 3-bed (€262,000), 4-bed (€345,000), and 5 bed (€410,000).
Euribor – the rate used to calculate interest payments for most mortgages in Spain – has risen above 4% in January (4.063% – to be confirmed by the BoS). This is the 16th consecutive monthly rise in Eurozone mortgage rates, and the highest rate since August 2001.
Euribor has risen from 2.83% to over 4% in a year. In percentage terms, Euribor has rise by over 40% in a year. This means that the average Spanish mortgage will now cost around 1,200 Euros more per year.
The value of the average Spanish mortgage in October 2006 was 142,930 Euros, up by 12.2% in a year, but down from 143,313 Euros in September 2006. A typical Spanish mortgage interest rate will be Euribor + 1%, so many Spanish mortgages will now have monthly mortgage interest payments of 5%. Property financing costs are now eating up over 40% of average Spanish household income, considerably higher than the 33% that is considered to indicated a comfortable level of mortgage borrowing.
Nevertheless, and recent increases notwithstanding, the present level of mortgage rates in Spain is a long way from the peaks achieved in 1996 (8.7%), and 1991 (15.3%). So relative to other periods in which mortgage rates were high, the present levels are quite modest.
Euribor rates are derived from the Eurozone base rate set by the European Central Bank (ECB). The ECB left base rates unchanged at 3.5% in January, but Jean-Claude Trichet – President of the ECB – has dropped heavy hints that rates will soon be going up again.” Interest rates are still low,” said Trichet, who also warned of “very strong monetary and credit growth, along with abundant liquidity in the Eurozone.” Industry experts forecast another quarter point rise to 3.75% in base rates in March 2007.
The Spanish cadastral office has introduced a new system to clamp down on tax fraud. The new system enables the tax authorities to identify when buyers and sellers under-declare sales values to avoid taxes. According to Jesus Miranda – head of the cadastral office – the sale value recorded in the deeds is only correct in 15% of transactions. In the remaining 85% of transactions, property values are under-declared by 30% to 40%. The Spanish tax agency has also started to compare asking prices in classified adverts and internet portals with final sale prices declared in deeds. Differences of up to 50% have been noted in many cases. The Spanish tradition of under-declaring property values and part paying under-the-table in cash to avoid taxes is getting riskier.
A January article in the Italian daily ‘Il Corriere de la Sera’ put Spain’s recent economic success under the microscope, and came up with some disturbing conclusions.
According to Daniel Gros, director of the Centre for Political Studies in Brussels, over 10% of Spain’s GDP comes fro m the real estate sector, so Spain is heading for a period of stagnation if (when) Spain’s property bubble bursts. Gros expects Spain’s property sector to stall because 85% of Spaniards already own a home, because housing starts in Spain are double the level of France and Italy combined (and three times more than in the UK), because Spanish property prices have tripled over the last decade, and because Spaniards have taken on an unsustainable amount of debt, now standing at 105% of disposable household income. Gros expects a real estate crunch to force the Spanish government to restructure the economy, and rely less on the property sector for economic growth and jobs.
A January article in the Spanish daily ‘El Pais’ discussed some common property fallacies widely held in Spain. These are that property prices never go down; that prices rise fastest in cities with a limited stock of building land; that property is more profitable than the stock market over the long term; that residential property prices in Spain must rise to converge on the European average; and that foreigners will continue to buy property in Spain, when the evidence suggests that foreign investors are actually losing interest in Spain. José García Montalvo, a professor at the University Pompeu Fabra, suggests that tax breaks that encourage buying property over rented accommodation should be eliminated if Spain’s property bubble is to be deflated.
Mortgage defaults on the rise
New figures from the Bank of Spain reveal that mortgage defaults rose by 26% last year, as increased borrowing and higher interest rates start to take their toll. 70% of Spanish savings banks expect mortgage defaults to rise in 2007.
600,000 housing starts forecast this year
The Madrid House Builder’s Association (ASPRIMA) forecasts 600,000 housing starts in Spain during 2007, a substantial fall from the more than 800,000 in 2006, but still significantly more than any other European country builds.
10% of the Spanish tax take comes from property transactions
A new report from the Spanish bank BBVA reveals that almost 10% of Spanish government income, the equivalent of 3.2% of GDP, comes from taxing property sales. Municipal government is especially dependent upon property transactions for income, so local government funding will be hit the hardest by any downturn in the Spanish property market.
Foreign investors losing interest in Spanish property
Latest figure from the Bank of Spain show that foreign investment in Spanish property continues to fall (down 12.1% to the end of October 2006), whilst the amount that Spaniards invest in property outside of Spain has doubled. Although foreign investment in Spanish property fell in 2005 and 2006, October offered a slight improvement, with the amount invested by foreigners rising by 10.3% compared to October 2005.
© Mark Stucklin (Spanish Property Insight)