February 2007: Every year, about this time, I review Spanish property market’s performance in the previous year, and take a look at the forecasts for the coming year.
Spanish property market overview
A few years ago Spain was in the grip of a property boom, and foreign buyers were falling over themselves not to ‘lose out’. Much of the heat has now gone out of the market, not least because a constant stream of bad news has shaken foreign buyer confidence in Spanish property, whilst relatively high prices, and competition from cheaper destinations such as Morocco and Bulgaria, has reduced demand for Spain. It is now a buyer’s market in many popular tourist areas, and great value can be found if one is prepared to make the effort. But whilst the stock of unsold properties is accumulating, and prices in many areas are stagnating, there is still a sizeable overhang of overpriced properties lying in wait for ill-informed buyers. This is especially true of resale properties, as many vendors have not yet adjusted their price expectations to market realities. It may be a buyer’s market, but buyers need to be savvy, and seek out value if they are to avoid overpaying.
According to the Spanish government’s figures, average national Spanish property prices rose in nominal terms by 9.1% over 12 months to the end of 2006, ending up at 1,990 Euros/m2. This represents a clear slowdown in Spanish property inflation, down from 18.5% in 2003, 17.2% in 2004, and 12.8% in 2005. Based on the Spanish government’s figures, it looks like the Spanish property market is on course for a soft landing, in which property prices will rise in line with general inflation.
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Continuing with the Spanish government’s figures, property prices rose the most in the province of Lugo (Galicia) at 18.5%, and the least in Caceres (Extremadura) at 3.3%. It is interesting to note that the best performing regions last year were in central and northern Spain, which are largely ignored by English-speaking buyers. On the other hand Spain’s Mediterranean coastal provinces and islands were some of the worst performers: Prices in Alicante province (Costa Blanca) rose by only 5.1%, and in Tenerife (Canaries) by 5.6%, though Girona (Costa Brava) managed a respectable 13.2%, and the Balearics 11.8%. Madrid had a bad year near the bottom of the table with 6.1%, whilst Barcelona did somewhat better with 10.4%, up from 8.9% last year. Overall, though, the government’s figures paint a picture of a slowdown in the Spanish property market.
Figures from Kyero.com – a leading Spanish property portal that publishes a Spanish Property Index – show that average asking prices fell in 2006, down by 1.6% to an average asking price of 245,000 Euros (asking prices are not the same as transaction values, which are likely to be between 5% and 30% lower in a buyer’s market). Kyero’s figures confirm the broad trends seen in the government’s data: The market is coming off the boil, and previously hot Mediterranean markets like Alicante (- 1.5%) and Malaga (+3.4%) are now struggling to deliver positive results. On the other hand the Balearics had a good year, up 15% to an average asking price of 458,800. Star performers were the provinces of Jaen (+23.2%) Seville (+17.8%), and Castellon (+16.6%). Jaen is still one of the cheapest provinces, with an average property price of 85,000 Euros, according to Kyero.com.
Interviews with property professionals in different parts of Spain lend some support to these figures, but if anything show that the government’s figures are too optimistic. Property professionals working in Malaga province on the Costa del Sol report that the overall market is tough, and prices are where they were 2 or 3 years ago. On the other hand they also report that attractive, quality property that is well priced still sells quickly. In Murcia and the Costa Blanca the story is more or less the same, though in the most over-developed areas of these regions it is increasingly difficult to describe anything as ‘attractive’.
In the Costa Brava and the Balearics, property prices still appear to be rising modestly, though properties are not selling as easily as they did 3 or 4 years ago. In Ayamonte, on the border with Portugal, off-plan investors were still driving the market in 2006, though that now appears to be cooling down. All agents, in all areas, report that demand from Spanish buyers was more robust than foreign demand, especially at the expensive end of the market.
So 2006 was a year in which the Spanish property market continued to cool down after the boom years of 2000 – 2004. Mortgage borrowing growth peaked, and foreign investment in Spanish real estate fell 12.6% (12-months to the end of October 2006), having also fallen in 2004 (-6%) and 2005 (-17%). Interest rates (Euribor) rose from 2.833% at the start of 2006, to 3.93% at the end, a 41% increase in percentage terms, adding another 1,000 Euros per annum to the costs of paying the average Spanish mortgage. Spanish property prices that have now risen on average 100% in the last 5 years, and demand, both local and foreign, is cooling in response to all these factors. As a result properties are taking longer than ever to sell, and the stock of unsold properties is increasing.
But perhaps the most alarming imbalance in the Spanish property market today is the high level of housing starts in Spain. There were approximately 800,000 housing starts in 2006, almost 3 times the EU average. Spain is Europe’s biggest cement market, consuming 66 percent more than Germany, whose economy is almost three times as large. This is clearly unsustainable, and Spain’s economy has become alarmingly over-exposed to the construction sector as a consequence (50% of all Spain’s capital investment goes into real estate, which is also responsible for half of all new jobs and a sizeable chunk of both Spanish GDP and GDP growth).
If housing starts continue at this level, or even at the rate of 600,000 forecast for 2007 by the Madrid House Builders’ Association (ASPRIMA), Spain could hit a crisis of oversupply, if this is not already happening. As things stand the industry does not appear to be adjusting to cooling demand. In an unusual step the Bank of Spain has warned the property sector this February about expanding capacity and increasing borrowing at a time when demand is clearly cooling.
But despite the slowdown, it is also looks as if there are deep reserves of potential demand for Spanish (coastal) property amongst foreign buyers, principally the British and the Irish. A recent survey from the Institute for Public Policy Research shows that there are already 761,000 Brits living in Spain (990,000 if you include part-time residents), and millions more wish to join them.
The demand exists, but given a) Spain’s high property prices, b) the chance that prices might fall, and c) the stink of corruption and illegal building wafting from Spain’s property market, many potential foreign buyers are deciding to wait and see. So the problem is not the level of potential foreign demand for property in Spain, which I believe is still strong. The problem is that buyers are worried about risking their savings in a market blighted by corruption scandals, illegal building, mindless development, and dodgy property companies. It’s essentially a confidence problem, not a demand problem.
One of the most important changes in the market is the fact that English-speaking buyers in general are now better informed, more aware of the common problems, and more demanding than in the past. This is a structural change that companies selling to foreigners will have to come to terms with. In the internet age, geographically dispersed buyers can share their knowledge and experiences to an extent that was not possible even 5 years ago. This has led to a power shift away from sales organisations and towards buyers.
To take advantage of the present market buyers need to be savvy, well informed, and looking for value. 2007 will be a good year for buyers who are prepared to look around, and do their research. Vendors who are serious about selling will need to drop their prices, as will developers of mediocre new developments (some of whom will run into financial difficulties this year).
© Mark Stucklin (Spanish Property Insight)