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Spanish Property Market Report Q1 2008

In some respects, the Spanish property market is a disaster, with transactions plummeting by more than 40% during February (compared to February 2007) in key regions such as Catalonia. Despite the fact that newly built properties are selling better than resales, developers are also having a terrible time of it, with sales down by around 60% since September 2007, swelling a growing stock of 500,000 + unsold new properties. On the other hand, prices don’t appear to have collapsed, at least not yet, and there are pockets that aren’t doing too badly, basically in the highly-differentiated, quality segments in good locations. That’s a rough overview of a complex situation in which plenty of exceptions can be found.

Latest Spanish Property Market Statistics

The most widely used housing market statistics in Spain are the quarterly figures released by the Ministry of Housing.

The latest figures, published last week, show that average national property prices rose by 3.8% to 2,101 Euros/m2 over 12 months to the end of March 2008. On a quarterly basis, average prices rose by 0.8% in the first quarter of the year.

In the Spanish press much was made of the fact that property prices have declined in real terms for the first time in a decade. With consumer price inflation running at 4.5% in March, a nominal increase of 3.8% in house prices turns into a fall – after adjusting for inflation – of 0.7%. So thanks to inflation, the average Spanish property is now worth less than it was a year ago. Even so, given the carnage in the market, you would be expecting significant nominal falls about now, as is happening in the US and the UK, not just inflation-adjusted falls. The answer lies in Spain’s dodgy official housing market statistics, more of which later.

As usual, regional variations of property price changes were significant. The biggest 12-month increase was in the Andalucian province of Huelva, on the border with Portugal, part of the Costa de la Luz, where prices increased by 9.5% over the last year, at least according to the government’s figures. Pontevedra, in Galicia, was next best with 7.6%, followed by Asturias, also in the north of Spain, with 7.3%. Madrid, Spain’s capital and biggest housing market, was the weakest, with a nominal gain of just 0.1%, followed by Alicante, home to the Costa Blanca, with 1%.

On a quarterly basis (Q4 2007 vs Q1 2008), prices increased by 3.9% in the province of Huelva, 3.6% in Seville, and 3.4% in Valencia, but fell in 5 provinces / regions: Madrid (-0.1%), Murcia (-0.2%), Tenerife (-0.3%), The Balearics (-0.5%), Cantabria (-0.7%), Alicante (-0.8%), and Castellon (-1.3%).

The following table gives average property 12-month inflation rates, and average property prices in €/m2 for a selection of regions and province popular with foreign buyers.

Region / province Price €/m2 annual % change
Huelva 1,785 9.5
Pontevedra 1,756 7.6
Asturias 1,776 7.3
Galicia 1,572 6.8
Teruel 1,050 6.7
Almeria 1,680 6.7
Valencia 1,634 6.4
Seville 1,791 6.4
Las Palmas 1,910 6.4
Granada 1,521 6.3
Tarragona 1,951 6.1
Cadiz 1,911 6.1
Andalucia 1,800 5.5
Murcia 1,614 5.3
Extremadura 1,027 5.0
Canarias 1,833 4.7
Girona 2,185 4.6
Catalonia 2,408 4.3
Balearics 2,458 4.2
Malaga 2,348 4.2
Barcelona 2,761 4.0
Cordoba 1,552 3.9
Spain 2,101 3.8
Valencia Region 1,685 3.6
Tenerife 1,746 3.4
Cantabria 2,036 2.5
Castellon 1,723 2.0
Alicante 1,740 1.0
Madrid 3,005 0.1%

The Spanish government’s dodgy housing market statistics

If you believe the government’s figures, then the situation doesn’t look too bad. Spanish property prices couldn’t carry on increasing at double-digit rates for ever, and what better way for the boom to come to an end than with a soft landing, in which property prices converge on the general inflation rate, like they appear to have done. Officials from the ministry of housing expect prices to track the inflation rate in the short to medium term, though they do admit that “there is still room for decreases.”.

The following chart tells the story of the rise and fall of the Spanish property boom according to the government’s official figures:

Spanish property price chart

Unfortunately, as I have repeatedly pointed out in the past, the government’s figures are notoriously unreliable. There is plenty of anecdotal evidence that prices are now falling by 10% or more, on top of falls of at least 10% in many popular areas last year. Talk to estate agents on the Costa del Sol, for example, and many report that prices are back to where they were 3 years ago, despite official increases of more than 20% in Malaga province over that period. Official figures are based on mortgage valuations, not transaction prices, which helps explain the mismatch. Others might not agree, but I don’t think that the government’s figures are much help for understanding the Spanish property market, though they do help to identify broad trends.

If official figures don’t tell us what property prices are doing, then who can we turn to for reliable data? Nobody, is the honest answer, when it comes to Spain. A lack of transparency is one of the market’s big problems, and everybody is more or less in the dark. Various different organisations, such as property portals, real estate consultancies, and appraisal companies, publish price data, but these reports are never based on final transaction prices, so never give us the true picture. For what it is worth most of these sources report that prices, or at least asking prices, are now falling to a greater or lesser degree. A report by IESE business school, in conjunction with the property portal Fotocasa.com, finds that prices fell by 2.7% over 12 months to January, whilst a study by Pompeu Fabra university, in conjunction with property company Tecnocasa, shows that resale property prices fell by 9.1% in the second half of 2007.

In this fog my best guess is that average property prices are falling by between 5% and 10%, and by as much as 20% in the most over-developed areas. However, prices for the best properties in the best areas are probably stagnant, or falling gently, though asking prices are coming down at a faster clip.

Spanish Property Market Activity Plunges

If the official data on property prices is unreliable, the same cannot be said for market activity. The vast majority of property transactions in Spain are inscribed in the property register, providing figures which the national institute of statistics now publishes on a monthly basis. These figures show that transactions of non-social housing (social housing is known as VPO in Spain) fell by 24% in February compared to the previous year, and by much more in key regions such as Catalonia (-42%), The Balearics (-38%), and Madrid (-30%). Resale property transactions fell even more dramatically, down by 34% on average, 48% in Catalonia, 43% in The Balearics, and 37% in Madrid. Newly built property transactions were only down by 11% on average, but this probably reflects off-plan sales made in better days now coming to completion. New sales by developers are now down by as much as 60%.

Whichever way you look at it, the Spanish property market is contracting substantially. The market is contracting because demand has fallen, partly in response to a tightening of mortgage lending related to the credit crunch, but also because the boom was highly speculative and simply unsustainable. In the meantime, the supply of property continues to grow, as developers finish properties started in the boom years, adding to the overall stock of unsold properties, which some estimate at over 1 million.

One bit of good news, depending upon how you look at it, is that housing starts are at last starting to fall, as developers react to falling demand. Planning approvals fell 49% in the first 2 months of the year, from 118,740 to 60,050. Building licences fell by 50% in January, says the Spanish ministry of development, and Spain’s association of developers and constructors (APCE) estimates there will be between 350,000 and 400,000 housing starts this year, down from 641,000 in 2007 (other ‘experts’ estimate as few as 200,000 housing starts this year; but to put that in perspective, it would still be around 80,000 more than the UK in a boom year). That is a good thing, as the last thing the market needs is more new properties, but it also means that 500,000 or more construction workers will lose their jobs, and nobody is sure where that negative economic feedback loop will lead. It could push the Spanish economy into recession, putting further strain on the housing market.

A few more stats to help you get an idea of the market situation:

– The Spanish government’s budget surplus fell by 51% in the first quarter, largely as a consequence of the downturn in the housing market cutting VAT receipts.
– Sales of white goods down 18.3% in the first quarter of the year.
– Overall retail sales down by 5.5% in March as the economy slows down.
– 42,000 companies in the property sector, some 7.5% of the sector total, expected to close in 2008.
– The number of property or construction companies filing for administration jumped 147 percent in the first quarter according to credit insurer, Euler Hermes. Spanish developer Aisa looks like it could be the first listed company to go into administration.
– Unemployment rose to 9.3% in March from 8.1% last year, the largest rise in the EU, and the highest level in the Euro zone. Unemployment is rising as the construction sector sheds jobs.

The government is trying to do things to ease the pain, though only an incorrigible optimist will expect positive results.

It plans to build more social housing to mop up some unemployment, though building more housing will not help a market that is already flooded with property. What first time buyers and other groups that are priced out of the market need is lower property prices, not more housing, but developers continue to insist, against common sense, that newly built property prices will not fall.

The government is pushing through a €400 tax rebate for everyone in work, and eliminating the ‘wealth tax’ (known as patrimonio), which it hopes will boost consumption. The tax rebate won’t help non-resident or retired property owners, but the elimination of the wealth tax will reduce the cost of owning property in Spain for everyone.

Most significantly of all, the government has introduced a measure allowing borrowers to increase their mortgage terms at no extra cost. For some borrowers this might offer temporary relief, but in the long term they will end up paying significantly more for their properties than they would have done otherwise. Meanwhile Euribor – the interest rate used to set the majority of mortgages in Spain – has just risen to its highest level in 7 years.

Spanish property market forecasts

The Spanish property boom continues to unwind, and all the signs say this process has some way to go.

The Spanish ministry of housing estimates that the downturn will continue until 2010, with prices stagnating in nominal terms, and falling modestly in real terms, as the excess supply of property is slowly absorbed by the market. That said, the ministry has also stated that developers “still have room” to reduce prices in real terms to stimulate demand, though developers don’t seem to agree (they argue that land prices have to fall before developers can offer cheaper properties, and urge the government to free up more land for building – like the market needs more properties!).

The EU is more bearish about the Spanish housing market situation, expecting a harder landing. Spaniard Joaquin Almunia – the European Commissioner for Economic and Monetary Policy – believes that the Spanish property downturn is playing out “faster than expected, and will continue to do so.” His department forecasts that the Spanish construction sector will shrink by a third in the next 3 years, until housing starts meet “real demand” (estimated at 450,000 units p.a.) , rather than investment demand, which has largely disappeared.

So what?

So, is now a good time to buy or sell, given that the market is clearly heading into stormy waters?

Yes and no.

It is obviously not a good time to sell, because property prices are on their way down, and it’s a buyer’s market. If you have a property with strong selling points, then there are still buyers around, albeit in reduced numbers, and sales are happening if the price is right. If you have just another bog standard new build apartment then your sales prospects are poor; all you can do is ask significantly less than other vendors, and even that isn’t an option for many ‘investors’ with large mortgages.

If you bought at the start of the decade or before, then you should still be able to sell at a profit, even if you have to accept significantly less than a few years ago. Too bad you missed the top of the market, but console yourself with the fact that you will still make more money than you would have investing in the FTSE 100 (down 3% since 2000). If you bought anytime from 2003 onwards then you will probably have to take a hit to sell in today’s market.

It’s not a bad time to buy, but it depends on what you want. If you don’t mind buying an identikit, jerry-built new flat in a poor location then hold fire, as prices haven’t yet fallen to a reasonable level. It could take more than a year for this to happen (my estimate – could be wrong).

But if you want an attractive property in a desirable location, be it a city centre apartment or rural finca, then now is the time to start looking. Quality property is always in short supply, even in recessions. The good stuff isn’t going to collapse in price, and I don’t think you will see falls of 50% for quality, the odd exception notwithstanding. But the heat has gone out of the market, asking prices are falling, and vendors are accepting offers. This means it should be possible to buy an attractive property for less today than in recent years. I don’t think there is a hurry to buy now, but you might miss the buyer’s market for quality property if you leave it, say, 2 years. That said, I also don’t think that prices are going to come back strongly anytime in the next 5 years.

It’s easy to forget, but property markets are cyclical, so periodic downturns are inevitable, as are the booms. The present downturn might be particularly ugly because the boom that preceded it was so deranged. But one day confidence will return to the market, as it always does. Over the long term, quality property in Spain is a good store of wealth, and a source of happiness, do buy at a good price now, and you are unlikely to regret it.

As always, if buying in Spain, be very careful what you buy. There are significant risks like ‘land grab’ laws, illegal building problems, the coastal law (ley de costas) issue, developers going to the wall, and crooks still lurking in the business. When spending so much of you money be sure to look after number 1, because if you don’t, nobody will do it for you.