Every year, at the end of February, I review the performance of the Spanish property market in the previous year, and look at the forecasts for the coming year. The bottom line is that 2006 was a difficult year in many parts of coastal Spain (but not all). But it’s also clear that, when the price is right, attractive properties in pleasant areas don’t hang around, and potential demand is still strong. In my opinion there is no point waiting for attractive, quality properties to fall to bargain prices because I don’t think it will happen. On the other hand it should be possible to find good value this year, but only if you do your research. And in this jumpy market, buyers would be well advised to focus on quality property, which always holds its value in the long term.
For more detail on forecasts for 2007 check out the report (see below).
Spanish Property News
The slowdown of the Spanish property market was a popular topic in the Spanish press during February.
The Spanish daily ‘El Pais’ reports that “the party is over”, at least according to Joan Ollen – president of Barcelona’s professional association of estate agents. This is based on the fact that sales of resale properties have fallen by between 40% and 50% since June 2006. Figures from the land register also reveal that the number of property transactions in Spain has been falling for some time, with 22,800 fewer transactions in the first quarter of 2006, compared to the same period the year before. The almost complete disappearance of property investors is one of the causes of the slowdown mentioned in the article.
An article in the Spanish financial newspaper ‘El Economista’ says that property developers in Spain are beginning to feel the pinch in their pockets, as their margins shrink. The article refers to a new report from the consultancy ‘Grupo I’ showing that developers’ before tax margins have fallen from 15%-20% in 1990, to 13-18% in 2005, and 9%-14% this year (expected).
All of which is keeping developers awake at night, according to an article in the Spanish daily ‘ABC’. What most worries developers is a price war if some start offering discounts to try and shift the many newly built properties presently hanging around on the market. Developers who drop prices and make sales may benefit, but it might lead to a slump in the price of newly built and off-plan property.
Developers in the Autonomous Region of Valencia see the slowdown as a return to ‘normality’, according to an article in the regional newspaper ‘Levante’. In the recent boom years 50,000 properties were built and sold each year in the province of Alicante alone. Between now and the year 2010 developers forecast 65,000 property sales per annum in the whole of the Valencian Region, of which only half will be newly built properties. The article quotes Benjamin Muñoz of the Valencian developers’ association as saying that the slowdown “is a return to normality, and not a crisis.”
Euribor – the interest rate most commonly used to calculate mortgage payments in Spain – rose again in February to 4.09% (to be confirmed by the Bank of Spain).
This is the 17th monthly increase in Euribor, and places it at its highest level since August 2001. Euribor is now 40.5% higher than a year ago, and 95% higher than in June 2005. This means that variable-rate mortgage interest payments in Spain have also risen substantially.
As a result of the latest increase in Euribor, monthly mortgage repayments on the average Spanish mortgage of 140,275 Euros over 25 years will increase from 696 Euros/month to 787 Euros/month, an increase of 91.5 Euros per month, and 1,100 Euros per year. The value of the average mortgage loan taken out in Spain grew by 12.6% in 2006, according to Spain’s National Institute of Statistics (INE). Overall mortgage lending grew by 23.3% in 2006 – the lowest level of growth since 2003.
Euribor is derived from the Eurozone base rate set by the European Central Bank (ECB). The ECB left the Eurozone base rate unchanged at 3.5% in February, but is expected to raise it gain at the next governing council meeting on 8 March, most likely by 25 basis points to 3.75%. Futures trading shows that markets expect the ECB to raise the base rate to 4% by September, even though inflation has stayed below the ECB’s 2% ceiling for the last 5 months.
Commenting on base rates during a February interview European Central Bank council member Axel Weber (head of Germany’s Bundesbank) said, “We need to reach a rate level that’s more appropriate than the current one.”
BBVA – one of Spain’s largest banks – expects the base rate to rise to 4.25% in 2007, with quarter point increases in March, June, and September. To some extent the present Euribor rate already reflects some of the expected increases in the base rate. Nevertheless, if the base rate does continue to rise, Spanish mortgage rates, and with them the financial burden on property owners in Spain, will also rise.
The Spanish financial newspaper ‘El Economista’ reports of alleged plans by the town hall of Chiclana de la Frontera (Cadiz Province, Andalusia) to allow the construction of 40,000 illegal properties without planning permission (10,000 more than the number of illegal properties in Marbella). In the light of multiple urban planning irregularities in this municipality, Jose Chamizo – the citizen’s ombudsman of Andalusia (defensor del pueblo) – has called on the authorities to investigate at once. Foreigners thinking of buying in this area should take note and proceed with extra caution.
6 times more new properties than new resident in Galicia
The housing stock in Galicia (North West Spain) is growing 6 times as fast as Galicia’s population. In the last 6 years planning permission has been given for 204,000 properties, at a time when the population has only gown by 35,000 people. Which begs the question; who is going to live in all those new properties?
Spanish resale property asking prices at least 10% too high
According to a recent article in the Spanish daily ‘El Mundo’ the asking prices of resale properties in Spain are between 10% and 30% (or more) too high. Many experts expect the slowdown in Spain’s property market to bring down asking prices to more realistic levels.
Indebtedness of developers and builders worries Bank of Spain
Jose Luis Malo de Molina – director of research at the Bank of Spain – has expressed concern at the increasing level of indebtedness of Spanish developers and construction companies. Developers appear to be borrowing on the assumption that Spain’s real estate boom continue indefinitely, when all the evidence points towards a slowdown in the market.
Bank of Spain questions validity of official housing market statistics
High leverage in the property sector was not the only thing worrying Jose Luis Malo de Molina of the BoS in February. He also pointed out that the official statistics for the housing market in Spain are not good enough. Given that housing is one of Spain’s principal concerns, and house building one of the most important sectors of the economy, Malo de Molina thinks it is time to introduce more accurate and reliable statistics.
As things stand, the official figures from the Spanish ministry of housing are prepared using data from the professional association of architects, notaries, property registrars, and registered appraisal companies.
But as Malo de Molina points out, the data from these sources is often contradictory. One of the reasons for this is that many transactions witnessed by notaries are not then inscribed in the land register.
Spain at risk of property crash
Spain and Ireland are the 2 Eurozone countries most likely to suffer a real estate crash, according to a new report from American Express Funds. The report likens the situation in these countries to the US housing market between 2003 and 2005, which lead to the US real estate slump that started in 2006
© Mark Stucklin (Spanish Property Insight)