Bullet points news roundup

• The IMF has warned that Spanish property is 15% to 20% overvalued, and that residential investment, at 9% of GDP – second only to Ireland – is way too high. Based on these two metrics Spain has more to worry about than the US, where the property market is undergoing a major slump.
• Spanish property is 40% overvalued if measured against historical rental yields (a type of price-earnings ratio), reveals a new study from the Instituto Juan de Mariana.
• Spanish property transactions fell by 14% to 788,518 in 2007 according to figures from the Spanish property register. New property sales fell by 12.4%, and resales by 15%.
• Asking prices for resale properties fell by 0.6% in Barcelona and Valencia, and 0.1% in Madrid during the first quarter of the year, according to figures from Idealista.com.
• Transaction prices are now 12.5% lower than asking prices in the City of Valencia, according to the estate agents’ association Coapiv.
• A new report from ratings agency Standard & Poor’s warns of a painful property market correction in Spain and the UK. The report goes onto say that Spanish property prices could fall by 5% over the next 2 years, which doesn’t sound very painful, and in reality has probably already happened.
• Home insurance premiums have gone up by an average of 4.1% since February last year, according to latest figures from Spain’s national statistics institute.
• Barcelona is running out of water due to a drought and, more importantly,  government incompetence. Reservoirs supplying Barcelona are down to less than 20% of capacity, and the water supply is expected to be cut off on an intermittent basis by the autumn. Water restrictions such as hose-pipe bans are already in place.
• Unemployment amongst immigrant construction workers has risen by 92% in the last year. General construction sector unemployment in Malaga (Costa del Sol) is up 44% in a year.
• The property downturn has started to hit government revenues, reducing VAT receipts by 8.2% in the first 2 months of this year.

Not so much hard landing as crash landing

“Brace brace!” Despite 2 years of the government talking up a ‘soft landing’ it looks increasingly as if the Spanish property market is going to miss the runway. If you are on board you might want to lean forward and put your head between your knees.

Almost every day in March there was fresh evidence that the Spanish property market has lost all power in its engines. The national statistics institute revealed that residential property sales collapsed by an average of 27% in January compared to the previous year, with sales plummeting by more than 40% in key regions like Catalonia (-42%) and The Balearics (-45%). For a full regional breakdown of Spanish property sales in January you can have some fun with this table.

Property consultants CB Richard Ellis published a report showing that planning approvals for new homes fell by 25% to 618,503  in the first eleven months of 2007, down from 865,651 planning approvals in the same period 2006. The fall is sure to be more dramatic in 2008, and even a Spanish developer’s association (Asprima) admits that new housing starts could fall by as much as 50% in 2008. If so, that means massive construction sector unemployment, with as many as 600,000 people set to lose their jobs in the construction sector alone. This will hit Spanish economic growth hard, putting further downward pressure on property prices.

But whilst planning approvals and new housing starts are plunging, the number of completed new homes coming onto the market is still rising. According to the CB Richard Ellis report, construction completions rose by 10% in 2007, whilst sales fell by 12%, inflating an already massive stock of around 1 million unsold properties. This trend is set to continue in 2008, as the close to 900,000 planning approvals of 2006 start coming onto the market. This highlights the classic problem of long lead times in the housing sector. Demand, like a speed boat, can slow down very quickly, but trying to reduce supply is like trying to stop a super tanker.

In some areas the market has been almost completely wiped out, particularly in coastal areas with a lot of holiday homes. Procosta – the developer’s association of the Vega Baja region of the south Costa Blanca – has said that sales in the region are down by 80%. The Vega Baja region, which includes towns like Torrevieja and Catral, is a budget destination that has been popular with British buyers.

The exchange rate sends British buyers packing

British buyers , as the second largest group of property buyers after the Spanish, are critical to the Spanish property market. Over the last couple of years British buyers have been turned off Spain by stories of corruption scandals, demolition threats, land grabs, and unease about the market and prices. Now the exchange rate is doing its bit to turn British buyers away. The pound has fallen 7% against the Euro since the start of this year, adding around 11,000 pounds to a typical €200,000 purchase.

Falling confidence saps demand

Demand for property in Spain is now clearly suffering from declining confidence amongst all buyer groups. Hardly a day goes by without the Spanish press reporting the doom and gloom from Spain’s ‘property crisis’, filling the pages with stories of falling prices and failing developers.  In a report just released the IMF’s argues that Spanish property prices are overvalued, and will have to fall by 15-20% in real terms to return to fair value. The IMF has been issuing warnings for some time, but only now that market confidence has evaporated are people starting to listen. There will be no rebound until confidence returns to the market, and there is no sign of that happening soon.

Falling property prices

If you believe the government’s figures, then Spanish property prices are still rising, albeit at a much reduced rate of around 4.8%. The government’s figures, however, are notoriously unreliable. Talk to anyone in the business, and the word is that prices are falling, buy as much as 20% or more in some areas. A new study by IESE business school, based on the asking prices published at fotocasa.es – a leading Spanish property portal – finds that average Spanish property asking prices have fallen by 4.3% over 12 months to the end of February, with asking prices falling by 8.3% in the Valencian Region. Having said that, many forum contributors still report that significant prices falls across the board have yet to be seen.

Failing developers

The list of Spanish developers seeking protection from creditors, or reporting liquidity problems gets longer by the day. Developers like Labaro and Grupo Sanchez, with projects in popular coastal areas that have been sold to foreign buyers, have joined the list in March.  In the first quarter of 2008 many developers haven’t made a single sale, which means they are now being strangled by falling operating cash flow, rising financial costs, and no access to new credit. Some of the biggest developers in Spain are desperately trying to renegotiate repayment terms on billions of Euros worth of debt.

If anything, the number of developers running into trouble is set to increase over the next few months. This creates dangers and opportunities for potential buyers. On the one hand the present market means that buyers are in a strong negotiating position with developers, most of whom should now bend over backwards to make a sale. But on the other hand, the last thing you want to do is hand over money to a developer who then goes bust. Only buy from the very best developers with a reputation for quality and financial backing you can feel confident about, and don’t make any payments without a bank guarantee.

Town hall corruption cases multiply

Whilst the property market chokes, and developers struggle to stay afloat, the true extent of town hall corruption in Spain is becoming ever more apparent. Town hall corruption is nothing new, but it flourished like never before during Spain’s recent property boom.

Almost every week one reads of local politicians and officials being arrested on corruption charges, almost always relating to real estate deals. The mayor of Zurgena, in Almeria, has just been arrested, along with the boss of a developer called New Horizon Villages, which specialises in building and selling property to British buyers in the region.

But the biggest news is the arrest of Daniel García Madrid, the mayor of Torre Pacheco in Murcia, and former lawyer of Fecundo Armero – one of the founders of Polaris World.  Fecundo Armero, who sold his stake in Polaris World to a group of investors including Credit Suisse for 300 million Euros is also being investigated, and, inevitably, so is Polaris World. José Luis Hernández – president of Polaris World – has been called in for questioning, as have other members of Polaris World’s management. It’s going to be interesting to see where this investigation leads.

The Valencia ‘land grab’ saga rumbles on

The petitions committee of the European parliament has once again censured The Valencian Region for its vicious ‘land grab’ law (known as the LUV – Ley Urbanística Valenciana, which replaced an even worse law known as the LRAU – Ley Reguladora de la Actividad Urbanística). This law enables unscrupulous developers and corrupt mayors to collude in expropriating land from private owners, and force them to contribute tens of thousands of Euros to the cost of urbanising the land taken from them.

British MEPs Michael Cashman and Neil Parish asked for the Spanish government to impose a moratorium on new building projects until the land grab problem has been resolved, whilst Austrian MEP Herbert Bösch proposed that EU financial contributions to The Valencian Region be frozen until the land grab problem is sorted. “I’m surprised that the Spanish haven’t come up with a better way to get rich than robbing land from owners,” said Swedish MEP Ulla-Britta Perret.

Condemnation of Valencia’s urban planning law was almost universal, with only some right-wing Spanish MEPs supporting it. Most Spanish MEPs joined in the condemnation, but the government of Valencia’s response has been to dismiss all criticism as unfounded. “What we need is more building projects, and also more golf courses to generate tourism,” was Valencian environmental and urban development minister Jose Ramon Garcia Anton’s response to the request for a building moratorium.

Michael Cashman has proposed that the European parliament prepares another report on the abuses being carried out under Valencia’s urban planning law. This proposal will be considered by the EU parliament on May 26.

Spanish banking exposure to real estate is “frightening” says a big cheese

Miguel Blesa, head of Caja Madrid – one of Spain’s biggest savings banks – has said that the real estate exposure of some Spanish financial institutions is “frightening”. International money markets seem to share this opinion, with The Daily Telegraph reporting that foreign banks have been dumping Spanish mortgaged debt at a 40pc discount. Even so, Spanish banks are managing to issue bonds, but it is costing them around ten times more than a year ago. This is having a negative impact on the property market, as a lack of liquidity forces banks to cut back on mortgage lending. Reduced mortgage lending puts downward pressure on property prices, which puts bank balance sheets under strain, forcing them to cut back on lending, and so on. It’s what they call a vicious circle.

Mortgage news

Euribor for February 2007: 4.59%

Euribor – the interest rate most commonly used to calculate mortgage payments in Spain – rose strongly in March to 4.59%, reversing a trend of falling Euribor rates in the first 2 months of the year. This was the biggest monthly increase in Euribor since March 2006, and by the end of the month Euribor was well above 4.7%

Euribor is now 12% higher than it was a year ago, and the March rise means that borrowers on annually-resetting variable rate mortgages will see their annual mortgage payments rise by an average of 480 Euros. According to the National Statistics Institute the average Spanish mortgage has a value of €142,793, and a term of 26 years, which means a €40 rise in monthly mortgage repayments from €786 to €826.

Euribor is derived from European Central Bank (ECB) base rates, which were left unchanged at 4% in March. The ECB has made clear that controlling inflation remains its primary concern, warning that base rates may even have to rise to choke off inflation in the Euro zone. The ECB’s reiteration of its hawkish stance in March helps explain why Euribor has started to rise again after 2 months of declines. Euro Zone inflation reached 3.5% in March, well above its target rate of below but close to 2%. Inflation in Spain rose to 4.6% in March.

All of this means that falling mortgage rates are unlikely to ride to the rescue of the Spanish property market. If anything, mortgage rates in Spain are set to continue rising, putting further pressure on household budgets, and reducing demand for Spanish property.

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© Mark Stucklin (Spanish Property Insight)