May 2007 news review

Spanish Property News

+ Comment: Talk of a Spanish property crash is premature
+ Spanish property market outlook from a Spanish perspective 
+ British banks reduce lending to Spanish developers
+ OECD reduces 2008 Spanish economic growth forecast
+ Foreign investors return to Spanish property
+ British buyers head for new destinations in Spain
+ Demand for holiday homes in Spain 28% lower than forecast
+ Higher interest rates fail to dampen construction boom in Spain
+ Municipal election results could affect construction of more than 260,000 properties on the coast
+ Spanish mortgage news

Comment: Talk of a Spanish property crash is premature

The health of the Spanish property market has been a hot topic in the British press since Madrid’s stock market plunged in April. Much of the coverage has taken a Spanish property market crash for granted, confusing the stock market correction with a housing market crash. Okay, the property market in some areas popular with holiday-home buyers is in the doldrums, and yes, there may be worse to come if the Spanish economy goes into a construction-lead recession in the next couple of years (I give this an even chance). But the truth is that the Spanish property market has not yet crashed. Far from it; the economy is roaring along with 4.1% growth, and the stock market is hitting new highs, having made up all the ground it lost in April by the middle of May. So reports in the British press of the Spanish property market’s demise are premature, to say the least.

One consequence of the crash headlines is an increase in the number of people turning up in Spain under the delusion that desirable properties can be had for a song. Even in today’s market quality still has it’s price, and buyers looking for cheap property rather than good value will be disappointed if they want to buy anything other than the growing stock of dross at the bottom of the market.

Having said that there are plenty of reasons for concern (over development, corruption, absurd town planning, et al), and there is no denying that a glut of certain types of property in some areas already exists, which will continue to push some prices down further. For what it is worth, here is how I see Spanish property prices in popular coastal areas evolving over the next couple of years:

  • Outstanding property: 10% of market, prices increasing above inflation (currently around 3%).
  • Quality property: 20% of market, prices rising with inflation.
  • Average property: 50% of market, prices falling between 10 and 30%.
  • Below average property: 20% of market, prices falling by over 30%.


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Spanish property market outlook from a Spanish perspective

The state of the property market was also much discussed in the Spanish press during May. There is a consensus that the boom is over, though opinions differ on what to expect next. The following is a summary of ‘expert’ opinions as reported in the Spanish press during May.

The Spanish Government

Spanish property price increases will converge on inflation this year, according to finance minister Pedro Solbes. Spanish consumer price inflation was 2.4% in April, compared to real estate price increases of 7.2% in the first quarter of the year. Although Spanish property inflation has fallen considerably, from an annual rate of 18.5% in 2003, the present rate is still 3 times higher than the general inflation rate, if the government’s figures are to be believed, and will have to fall further in the course of this year for Solbes to be right.

Solbes also expects a gradual deceleration in construction activity during 2007, in response to slowing demand for property. Higher interest rates are beginning to bite, and the number of Spanish property transactions fell by 7% in 2006, according to figures from the Spanish property registry.

Solbes points out that Spanish economic growth is still strong, with the Spanish economy growing by 1.1% in the first quarter of 2007, or 4.1% annualised, compared to a Eurozone average of 0.6% and 3.1% respectively. Solbes sees positive signs of a rebalancing of Spanish economic growth, with less emphasis on construction, and more on capital investment and exports.

The Bank of Spain

Average Spanish property prices are overvalued by 24% and the rate of Spanish property price increases need to slow rapidly to avoid a hard landing for the property market, according to José Luis Malo de Molina, director general and head of statistics and research at the Bank of Spain.

The European Commission

The Spanish property market is cooling down gradually, according to EU commissioner Joaquín Almunia.

“I think the housing market in Spain, and in other Eurozone countries like Ireland, is adjusting gradually, which is the best possible scenario,” said Almunia in a press conference for the EU’s annual economic report on the Eurozone.

Almunia also dismissed the recent fall in the Spanish stock market. “I don’t see a direct relationship between the share prices of some property companies and the housing market.”

Morgan Stanley

Spanish property prices are overvalued, and a correction is likely, according to a new report entitled ‘Three Scenarios for the End of the Party’ by the investment bank Morgan Stanley.

“We believe that the construction boom is ending in Spain and that the forthcoming downsizing of this sector will undermine the Spanish growth performance over the next ten years.  We also believe that real housing prices are above their fundamentals and that a correction is likely, although the timing is hard to fathom.  However, our simulations show that a hard landing, i.e. a recession caused by a correction in the construction sector, is unlikely,” it says in the report’s conclusion.

Morgan Stanley is sanguine about the end of the Spanish property boom. “For Spain, the party’s over but this is not necessarily bad news: a continuation of the construction boom would increase, maybe not linearly, the probability and the potential macro disruptions of the unavoidable downsizing of the construction sector.  At this stage, investors should take notice of the change in Spanish fundamentals but they should not panic: the Spanish economy may lose its star status but should not become a lame duck either.”

Property Sector Organisations

Companies and trade associations from the property sector are still relatively optimistic about market’s outlook, in public at least.

Bruno Figueras – president of the construction sector trade fair Construmat – admits that the Spanish real estate sector is going through a change of cycle, but thinks that the change affects “holiday-homes and resale properties more than new developments of primary residencies, which I expect to keep increasing, albeit at a lower rate.” Figueras points out that anybody could be a property developer in the recent boom, and that a tougher market in future will clean out the sector, leaving only genuine professionals.

Spanish property prices will increase by between 5% and 7% this year, according to Don Piso – one of the largest estate agencies in Spain, with offices all over the country. Decelerating property prices in response to falling demand are normal at this stage of the cycle, after a decade long property boom, and show that the Spanish property market is on course for a soft landing. Rising interest rates and investors switching from property to the stock market can explain falling demand.  Nevertheless, Don Piso claim that demand for property is still robust, fuelled by immigration and Spain’s culture of investing in property.

There is no ‘property bubble’, and Spanish property prices will continue to increase by 3% to 5% per year, according to José Luis Marcos, director of the real estate company Roan. “After 8 boom years, and with strong balance sheets, it’s out of the question that developers are in crisis,” Marcos is quoted as saying. No reference is made to the huge amounts of debt that many Spanish developers have taken on in recent years to finance their expansion.


All the expert opinions reported in the Spanish press last month agree that the Spanish property boom is over. There also seems to be a consensus that the end of the boom will be followed by a soft landing in which property prices track inflation for a few years, or fall only slightly. This could, of course, be wishful thinking. What is certain is that none of the experts in Spain envisage the kind of property sector meltdown so enthusiastically reported in the British press. For what it is worth, I am more bearish than the experts, and think that there is at least a 50% chance of a construction-lead recession in starting in Spain during the next 12-24 months.

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British banks reduce lending to Spanish developers

British banks are reducing their exposure to Spanish developers, according to an article in the Spanish daily ABC.

British banks, such as the Royal Bank of Scotland, Halifax, and HSBC, are reported to have been some of the biggest lenders to the Spanish real estate sector in recent years, but have now changed strategy and are avoiding the sector.

According to a banking source quoted in the article, the change in policy “comes as no surprise, given that banks such as Credit Suisse are advising their clients against investing in Spanish property. Financial institutions are following the same advice for their own investments, having seen an increase in risks that makes it sensible to hit the brakes,”

OECD reduces 2008 Spanish economic growth forecast

In its latest report on the economic outlook, the OECD – a Paris-based club of rich economies – has revised upwards its forecast for Spanish GDP growth in 2007 to 3.6%, but revised downwards its forecast for 2008 to 2.7%.

The OECD attributes higher than expected economic growth this year to “private consumption, investment in plant and machinery, and strong public spending.”

Clear signs of a cooling housing market lead the OECD to forecast lower growth in 2008. “The fall in the rate of property price increases and land transactions, along with fewer construction licences suggest a slowdown in the residential construction sector,” says the report. The report also notes the risk of a bigger adjustment, given the large extent to which Spanish GDP is dependent upon the real estate sector. According to Morgan Stanley, the real estate sector is responsible for 17.8% of GDP, compared to 9.7% in France.

The OECD also voices concerns about the high level of Spanish household indebtedness at a time of rising interest rates, a situation that is likely to reduce consumption.

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Foreign investors return to Spanish property

Foreign investment in Spanish property has increased by 33% in the first 2 months of 2007, according to figures from the Bank of Spain. Foreigners spent a total of 806 million Euros on Spanish property in January and February, compared to 606 million in the same period of 2006. This is the first increase since the end of 2003, when the value of foreign property investments in Spain started to fall, and suggests that the trend towards lower foreign demand may have turned a corner.

British buyers head to new destinations in Spain

A new study from Barclays Bank reported in the Spanish press reveals that British house hunters in Spain are spurning traditional destinations such as the Costa del Sol and Costa Blanca in favour of emerging areas such as Murcia, Almeria, Galicia, and inland regions such as Castilla.

Demand for holiday homes in Spain 28% lower than forecast

Demand for holiday homes in Spain is expected to be 90,000 units, 28% less than the 115,000 originally forecast for 2007, according to the consultancy Grupo i. Of the 90,000 Spanish holiday home sales forecast this year, 60,000 will be bought by Spaniards, and 30,000 by foreigners. The forecast for holiday home sales in 2010 has also been revised down by Grupo I from 150,000 to 90,000 to 95,000 units. Corruption scandals, land grab worries, higher prices, and less interest from investors are some of the reasons given to explain the fall in expected demand, especially amongst foreign buyers.

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Higher interest rates fail to dampen construction boom in Spain

The construction sector grew by 5.8% in 2006, despite rising interest rates, according to a report published at Construmat – the construction sector trade fair in Barcelona. The report does, however, forecast a construction sector deceleration in the years ahead. The report also reveals that the construction sector employed 2,542,900 people in 2006, creating 186,000 new jobs in the year – one quarter of all new jobs created in Spain during 2006. The construction sector accounts for 13% of total employment in Spain.

Figures from Spain’s Ministry of Development, based on new residential building projects certified by Spain’s college or architects, also suggest a strong construction sector, with planning approvals rising by 8% to 217,218 in the first quarter of 2007. Despite the increase, the rate of growth in planning approvals has actually fallen from a year earlier, down from an18.3% rise in the first quarter of 2006.

There were 915,745 residential planning approvals in Spain during 2006, an all time record that is unlikely to be broken this year given the clear signs of a rapidly cooling housing market.

Planning approvals in the first quarter of the year, broken down type of property, show flats gaining at the expense of detached properties. There were 33,018 approvals for detached properties, a drop of 29.4%, compared to 184,127 flats, up by 19.4%. British and Irish buyers prefer detached properties, especially when looking for main homes, and are often disappointed by the mix of properties available in Spain, with its emphasis on mediocre apartments in high-density complexes near the coast.

Municipal election results could affect construction of more than 260,000 properties on the coast

The construction of more than 260,000 properties on the Mediterranean and Atlantic coasts could be affected by last month’s municipal elections, according to an article in the Spanish daily ‘El Mundo’. The change of government in some town halls, especially in Andalusia and Alicante, brings into doubt plans to build more than 264,000 properties, including golf courses and hotels. The new government in Marbella, lead by the right-of-centre Partido Popular, will have to decide what to do about some 30,000 illegal properties. The smart money is on a massive amnesty, in which the vast majority of illegal properties are legalised. There is a similar situation in Chiclana (Cadiz) and Ayamonte (Huelva), both provinces of Andalusia.

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Spanish mortgage news

Euribor – the interest rate most commonly used to calculate mortgage payments in Spain – rose again last month to 4.373% (to be confirmed by the Bank of Spain). This will push up the cost of financing a Spanish property purchase with a mortgage from a lender in Spain.

This is the twentieth monthly increase in Euribor, which is now at its highest level since May 2000. Euribor is now 32% higher than it was a year ago, and 108% higher than in June 2004.

The average Spanish variable-rate mortgage of 140,189 Euros over 25 years will now cost 809 Euros per month to repay, compared to 725 Euros per month before the latest increase in Euribor. This makes the average Spanish mortgage 84 Euros per month 1,008 Euros per year more expensive.

The Spanish Mortgage Association blames the rising cost of mortgage borrowing on the tighter monetary policy of the European Central Bank (ECB), and warns that highly indebted households are starting to feel the strain.

Juan Ramón Quintás – president of the Spanish confederation of savings banks (CECA) – is reported as saying that the level of mortgage defaults after the latest increase in interest rates is still surprisingly low, although there are signs that it is on the increase. Quintás points out that it is normal for mortgage delinquency rates to increase with interest rates. “Mortgage delinquency rates are still below 1%, compared to 7% that Spanish lenders have had to deal with on occasions in the past,” Quintás is quoted as saying.

Euribor is derived from the Eurozone base rate set by the governing council of the ECB during monthly meetings presided over by Jean Claude Trichet – President of the ECB. The ECB raised base rates from 3.5% to 3.75% in March, and then by a further quarter point to 4% on 6 June.  BBVA – one of Spain’s largest banks – expects base rates to rise to 4.25% by the end of the year, and Spanish property prices to fall in 2008 as a consequence. UK and US interest rates stand at 5.5% and 5.25% respectively, both higher than rates in the Eurozone.

Mortgage experts are reported in the Spanish press as arguing that Spanish households can manage the present level of mortgage interest rates in Spain, but will struggle to manage if base rates rise to 4.5% and Euribor to 5.5%, a scenario that nobody yet expects. One has to assume that the rising cost of borrowing will hit Spanish demand for holiday homes harder than demand for primary residencies, and that base rates of 4% will have a major negative impact on the ability of Spaniards – already feeling the pinch with mortgage on their main homes – to afford holiday homes on the coast.

According to the National Institute of Statistics (INE), the average Spanish residential mortgage in March was valued at 147,268 Euros, up 6.3% in a year, with a term of 26 years and an interest rate of 4.51%. Of the 169.709 mortgages signed in March, 97.9% were variable rate. The largest number of mortgages was granted in Andalusia (35,399), followed by Catalonia (26,137).

© Mark Stucklin (Spanish Property Insight)



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