This report aims to provide a snapshot of the current state of the Spanish property market, from an independent, and non-sales perspective.

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 and anecdotal evidence from Spanish property professionals.

Overview of the Spanish real estate market

Some alarming things have been written about the Spanish property market in recent articles like ‘Survive the Costa property crash’ (Sunday Times, April 29), ‘Costas house price crash’ (Times, April 27), ‘Euro helps topple Spanish property’ (Telegraph 25 April), and ‘Spanish property boom ends’ (Financial Times, April 24). Based on the headlines would think that the Spanish property market was in an advanced state of collapse. This is not actually the case.

The event that inspired all these gloomy articles was a share price correction of property companies quoted on the Madrid stock exchange, as jittery investors dumped construction stocks in April. At the time of writing shares of property companies are some 25% below their February highs. One company – Astroc – is down over 80%, though that still leaves it 120% up over 12 months – a great annual investment return by any measure.

The fall in property share prices was overdue and somewhat expected after speculation had pushed up prices too far. Much of the press reporting glossed over the stock market context, giving the misleading impression that it was the Spanish property market in trouble. Of course trouble in the stock market is not good news for the property market, as it reveals increasing pessimism about Spain’s housing market. But falling stock market confidence and property share prices it is not the same as a housing market crash.

In fact, the reality of Spain’s property market’s performance in the last quarter is not as bad as you might think from recent articles, but not as good as the official housing price figures from the Government imply. Spain’s decade long real estate boom is over, and it is a buyer’s market, but it is also a complex situation of regional markets performing in different ways.

Latest figures on the Spanish property market

Average national Spanish property prices rose by 7.2% to 2,024 euros/m2 over 12 months to the end of March 2007, according to figures from the Spanish housing ministry.

The story these figures tell is one of Spanish property inflation slowing down from 18.5% in 2003, 17.2% in 2004, 12.8% in 2005, and 9.1% by the end of 2006. This is the lowest rate of property price inflation since 1998, when Spain’s property boom started. 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 rise in line with general inflation. At the same time, all areas are still experiencing annual property price growth, and the national average is double the general inflation rate, providing a reasonable return on investment.

By autonomous region property prices rose the most in Ceuta and Melilla (13.8%), followed by Galicia (12.3%), and the least in Madrid (4.5%) and La Rioja (2.6%). Price increases in all of Spain’s Mediterranean provinces were below 10% for the first time in 10 years.

The problem is that the government’s figures have to be taken with a pinch of salt. They can be unreliable, and sometimes show property prices as increasing when they are falling. It is difficult to gather reliable housing price statistics in a country like Spain where under-the-table cash payments are still widespread. When cash payments start to fall, as it appears they might be, property prices recorded on deeds go up, even if transaction prices are falling.

Whilst the government’s figures show reasonable, if cooling, price increases, figures from Spain’s land register show a clear slowdown in transactions during 2006.

The total number of property transactions recorded in Spain’s property register – the Spanish equivalent of the UK’s land register – fell from 989.341 in 2005 to 916.103 in 2006, an annual drop of 7.4% in unit terms.

Resale property transactions fell by 4.97% to 526,509 units (57% of the total), whilst completed transactions on newly-built properties fell by 10.11% to 389,594 units (43% of the total).  Transactions fell in Andalusia by 7.3% to 178,189, in Catalonia by 8.8% to 152,802, and by 8% in the Valencian Region to 136,720. These figures show a market contracting against a background of an increasing supply of new properties. The notaries association has announced reported that property transactions in March of this year were 30% down on the year before.

On the question of property asking prices, which say something about the confidence of vendors, figures from Kyero.com show big variations in changes of regional asking prices over 12 months to the end of April. For instance asking prices appear to have increased by 10.7% in Malaga province, to an average of €304,355, but fallen by 12.5% in Mallorca, to an average of €515,000. This would imply that vendors are in the ascendancy in Malaga, but losing power in Mallorca. What is certainly true is that buyers and vendors have to adapt to the conditions of local markets, and negotiate accordingly.

Spanish property market feedback

The government’s figures may not be the most accurate, but they do at least capture the slowdown in the Spanish property market. Information from other sources tells the same story.  Real estate consultants Knight Frank report that sales times on the Spanish coast have doubled to between 24 and 30 months over the last 3 years. A study by property consultants Aguirre Newman finds that property prices on the Costa del Sol have fallen by 4.7% over 12 months, though part of this fall can be explained by a trend towards smaller properties. And a report from consultants Grupo I estimates that demand for newly built holiday homes on the Spanish coast will fall by 18.3% to 90,000 properties this year, with the market shedding 26,000 transactions – a drop of 22.4%- of newly built property in 3 years.

To understand what is really going on you have to break it down by region.

COSTA DEL SOL
Buyer activity on the Western Costa del Sol peaked in 2003 and has been falling ever since. Corruption scandals, money laundering busts, and illegal building problems in Marbella damaged buyer confidence in the whole region, and a deteriorating price-value calculation encouraged potential buyers to look elsewhere. “Property prices are back to where they were 2 to 3 years ago,” explains Mark Clifton of the Internationa Property Partners in Marbella.

But after several difficult years there are now some grounds for optimism. Malaga airport is being expanded, and a new rail link under construction along the coast should significantly improve access, and boost visitor numbers. Corruption is being tackled, demand is diversified, and vendors many now realise they have to accept offers. Attractive properties in the right areas and the best developments appear to selling quickly if the price is realistic, and inland there is an acute shortage of the kind of fincas that affluent British buyers want. “Buyers today are savvy people with money, who are well informed and know what they want, not the deranged investors with 100% mortgages who inflated the bubble a few years ago,” explains Barbara Wood, of The Property Finders.

This could be the best time in years to get quality property for a reasonable price on the Costa del Sol. But there is also a glut of rubbish identikit apartments in undesirable locations all along the coast, from Tarifa to Murcia and beyond. Steer well clear of these types of properties, wherever they are in Spain, as prices may well fall.

Example property price changes over last 2 years:
+ 2-bed, 2-bath duplex penthouse in the Elviria area of Marbella would have cost you around 317,000 euros 2 years ago, now would cost 325,000 euros, so little change.
+ 400m2 townhouse with communal pool in the exclusive Sierra Blanca urbanisation of Marbella was around 641,000 euros 2 years ago, now around 679,000 euros, though you could pay as much as 849,000 euros for same thing if you don’t research the market.

MURCIA
Murcia is an ambitious latecomer to the property game. There has been an explosion in the region’s property supply, with 10 times as many properties now being built than 10 years ago, much of it on golf course developments intended for foreign buyers.

In recent years relatively high prices on the coasts to the north and south drove property buyers, especially investors, into the arms of Murcia’s developers, with their easy-to-sell off-plan investments. But Murcia’s prices increased too far too fast, and resale prices on many projects have been coming down in search of demand for the last couple of years.

“Some developers don’t seem to build what British buyers want,” comments Gordon of Blue Med Properties. “When prices rise, buyers expect more in return, so there is now a glut of properties on new developments that don’t match buyer requirements at the price. That’s going to stop prices rising anytime soon.”

There are fewer British buyers around than in past years, though the ones that there are seem well informed, looking for value, and serious about buying if they can find it. Overall, the number of transactions is down, and given the amount of new property coming onto the market, expect prices to remain in the doldrums for some years. The few outstanding developments in the region, such as Hacienda del Alamo, which tick all the right boxes for British buyers, should benefit from buyers who like the region, and don’t mind paying for quality.

Example property price changes over last 2 years:
+ Typical 2-bed flat on coast, fully furnished, in complex with communal garden, pool, private parking now costs was around 150,000 a couple of years ago, now 135,000 Euros
+ Typical villa on a golf course (not front line) 3-bed, 3-bath, 200m2 plot (no pool), was 380,000, now 350,000 Euros

SOUTH COSTA BLANCA
The south Costa Blanca, centred on Torrevieja, is a great example of how to turn a lovely coastline into a downmarket concrete jungle. Inland, the property market is a minefield of illegal built projects. Big estate agents on this patch happily rip-off their clients with outrageous commissions of 20% or more in return for paying a 200 pound inspection trip (sangria included).  If it’s not cheap, then it’s not good value, and if it is cheap, then it’s just cheap. This is a downmarket area with a bad cement habit, so don’t expect prices here to go anywhere, except perhaps down.

Example property price changes over last 2 years:
+ Typical 2-bed flat in Torrevieja costs 145k euros, same as 2 years ago
+ A villa with pool on one of the urbanisations in the Torrevieja area was 180-200,000 now 160-180,000 Euros

NORTH COSTA BLANCA
The North Costa Blanca, from Alicante up, is in better shape, especially the upmarket area around Javea, Denia, and Moraira. The market on the coast is subdued but stable, and many vendors are no longer asking silly prices. “There are fewer transactions then before, but there is still substantial interest in quality properties in good locations that a core of affluent buyers want,” explains David Mear of VillaMia in Javea. Even so, there are also pockets of overdevelopment in this area, and prices for the hard to sell stuff might need to come down by 10 to 20% to find a buyer.

Inland the market for detached properties with the right characteristics appears in fine fettle. “Detached properties with a bit of land and a pool, within 1 hour of the coast and the airport, and under 300,000 Euros are selling well. I can’t find enough of them for my clients,” says Andrew Lupton, head of Stacks Relocation in Spain.

Example property price changes over last 2 years:
+ 2-bed flat around Javea was 220,000, now 245,000 Euros
+ 3-bed villa on urbanisation in Javea area was 400,000, now 450,000 Euros

COSTA BRAVA
Transaction prices on the Costa Brava, in particular the Baix Emporda part of the coast, have been rising gently in the last couple of years. There is a good stock of upmarket properties, the market hasn’t been flooded with new apartments, and demand is driven by both European and local buyers from affluent cities like Barcelona. Nevertheless, the market is cooler than it was, with more properties on the market than before. Buyers have more negotiating power as a consequence, and vendors will consider offers. “There are still some silly asking prices around, but the chances that someone will pay them are lower,” explains Louisa Grundon of local agents PCI.

Whilst Spanish demand holds up it’s difficult to see prices falling, though it is also hard to imagine prices growing as strongly as they have in recent years. There are two factors that could shake up the market. On the one hand, the TGV-fast train will soon connect Girona and Barcelona, which could give demand for property a boost, and further drive up prices. But on the other hand, if the Spanish economy turns down, local demand for second homes could dry up, pushing down prices.

Example property price changes over last 2 years:
+ 2-bed flat walking distance to the beach at Pals, with communal pool and private parking was 180,000, now 225,000 Euros
+ 3-bed villa on urbanisation in Pals area was 350,000, now 425,000 Euros

MALLORCA
In the last decade Mallorca has consolidated it’s position as Spain’s top upmarket destination. Prices are high, but buyers are affluent, and there is a large stock of high-end properties. In a rare display of enlightened thinking for urban planners in Spain, they even banned new development on the island from a couple of years until May 2004, putting some restraint on the supply of new properties.

As with the rest of Spain, the market in Mallorca has cooled down, and asking prices are more realistic. “Buyers are better informed, and vendors more disposed to negotiate if they want to sell,” explains David Novi, of Novi Property Mallorca. “The overall number of transactions is down, but transaction prices are stable, foreign demand is steady, and it doesn’t look like prices will fall.” Mallorca benefits from diversified and affluent European demand, which reduces the risk of investing in property on the island. Menorca is stable, with low levels of new construction. Ibiza is a bit riskier, as there is a lot more property on the market, and its rave image is starting to get a bit tacky. On Formentera, vendors can still ask what they want.

Example property price changes over last 2 years:
+ Price of a 3 bedroom, 2 bathroom restored Alaro Town House, with a small garden / patio (traditional Mallorquin village house popular amongst many foreign buyers seeking homes away from the main coastal resorts) has risen from circa 260,000€ in 2005 to 330,000 today (i.e. approx 12%) per annum.
+ Price for a 2 bedroom, 2 bath apartment (under 5 years old) in the popular resort of Alcudia stands at circa 240,000€ today but was around 180,000 – 190,000€ in 2005. Again a similar growth rate.

Other factors

Interest rates and debt levels

Euribor – the interest rate used to calculate repayments for most mortgages in Spain – now stands at 4.249% after rising for 19 consecutive months. Euribor has risen by 32% in a year, and by over 100% since June 2004. Over 96% of mortgages in Spain are variable rate, which means that rising interest rates have an almost immediate impact on household budgets. At the same time, Spanish household debt has risen from 75pc of disposable income in 1999 to133pc at the end of 2006. Spaniards are up to their ears in debt, and the cost of debt is rising fast. This is bound to reduce local demand for holiday homes on the Spanish coasts, once again at a time when the supply of such properties is increasing.

Spanish housing starts

In 2006 there were 915,745 planning approvals according to Spain’s college of architects. According to the government there were 664,924 housing starts, and 597,632 building completions. In comparison there were 235,360 housing starts and 213,717 building completions in the UK, so Spain is building almost 3 times as many new properties as the UK. For several years now the supply of new properties in Spain has overshot demand for housing, and some 50% of these new properties are located in provinces along the Spanish Mediterranean coast.

If housing starts continue at present levels, the chances of a price crash in the Spanish property market will increase significantly. Both the Pedro Solbes (Minister of Finance) and José Luis Malo de Molina (Bank of Spain’s head of research) have suggested 450,000 to 500,000 annual housing starts as appropriate to meet demand for new housing in Spain, which in theory is driven by demographics, life style changes, holiday home buyers from northern Europe, and immigrants from the developing world. At present price levels, and with interest rates on the rise, it is difficult to see how demand will cope with even the reduced levels of supply suggested by Solbes and Malo de Molina.

Conclusions

The Spanish property market was incorrectly portrayed as melting down after the share price correction on the Spanish stock market. In reality, the overall market is not falling, though some regional markets are faring better than others. But the stock market jolt has help focus people’s attention on the serious imbalances affecting Spain’s housing market.

The big risk to the market comes from over-provision, as Spanish developers build several hundred thousand more properties per year than the market needs. This oversupply is partly due to years of inappropriately low interest rates for Spain once in the EUM.

With the Spanish economy now over-dependent upon the housing sector for economic growth and employment, there is a risk that a much-needed fall in housing starts will bring about a construction-lead recession in Spain. If this happens, demand for holiday homes will be hit hard, and house prices will fall in many areas. But even in this worst-case scenario, attractive properties in desirable locations with foreign appeal should hold their value, and recover quickly as economic conditions improve.

With the Spanish economy growing at close to 4% – one of the highest rates in the developed world – and with forecast growth of 3.7% in 2007, and 3.4% in 2008, it is difficult to imagine a construction-lead recession at present. Without a recession, the Spanish housing market is more likely to stagnate over the next few years than fall.

Having said that, there are many areas up and down the Spanish coast that suffer from a serious glut of over-priced, poor quality, unattractive properties in mediocre overdeveloped locations. Property prices in some areas are starting to fall, and are likely to continue doing so.

Buyers and sellers who wish to take advantage of the situation will need to do their research, keep a close eye on the market, and study local market conditions carefully.

© Mark Stucklin (Spanish Property Insight)