The big news in the second quarter was the collapse of one of Spain’s largest residential property developers, Martinsa-Fadesa, after declining sales and massive debts forced the company to seek protection from its creditors. This move leaves 12,500 of Martinsa-Fadesa’s clients, many of them British, wondering what will become of their money.
A shrinking property market
Martinsa-Fadesa’s financial problems speak volumes about the current state of the Spanish property market, in which demand is rapidly contracting whilst the supply of property keeps growing.
Market data from Spain’s Institute of National Statistics (INE) reveals that the number of Spanish properties sold in May fell by 31% to a total of 107,947 transactions (all figures compared to the same time last year). The market has shrunk every month this year for which figures are available (January -27%, February -24%, March -38%, and April – 7%), highlighting the severity of Spain’s ongoing property crash.
Ignoring rural and other types of property, and looking just at home sales in urban areas during May, the market shrank even more, by 34% to 50,161. On an accumulated basis, the urban residential market has contracted by 27% in the first 4 months of the year compared to 2007.
The official figures suggest that the resale market is suffering the most. Resale property transactions fell 44% to 25,280 in May, compared to a 21% fall (to 24,890) in newly built properties sold by developers.
The figures are somewhat misleading, however, as the INE’s figures are based on sales inscribed in Spain’s property register. What matters as much to developers is their pipeline of new clients. On this basis, sales by developers are dramatically down, by between 40% and 60% (in some cases much more). Sooner or later, this slump in sales will show up in the property register’s figures.
With sales down heavily, the number of developers seeking protection from their creditors is growing by the day. This reinforces the problem by scaring off potential buyers, creating a downward spiral. (Note, however, that bankruptcy is only affecting developers with too much debt, like Martinsa-Fadesa.)
By autonomous region, the market deteriorated the most in Catalonia, where it shrank by 52% from last year, followed by La Rioja (-45%), The Balearics (-43%), Navarra (-42%), and The Valencian Region (-41%). The only regions to experience any growth were Extremadura (+8%), and Cantabria (+36%).
The province hardest hit by falling sales was Girona (Gerona), in Catalonia, where sales in May fell 57% to 832, compared to 1,955 last year. Girona province is home to the Costa Brava, where a high proportion of holiday homes makes the market particularly vulnerable to the downturn. But even in Barcelona, where holiday homes are hardly an issue, the market shrank by 51%.
As Girona’s example suggests, the market for holiday homes is in particular trouble. Anecdotal evidence from estate agents on the ‘costas’ suggests that sales are down by at least 50%, and in some areas by much more. Outside of the super-luxury segment, the market for property in Marbella – Spain’s flagship holiday resort – shows little sign of life, and estate agents are still reported to be closing down.
A growing inventory of unsold homes
But whilst demand continues to contract, the number of properties on the market is still expanding. Thanks to the long lead times in the construction industry, new developments started at the height of the boom are still being completed, adding to the glut of newly built homes already languishing on the market. “The number of new homes this year will hit an all time high, more than in 2007,” said Jose Luis Malo de Molina, the director general of the Bank of Spain, at a recent conference in Valencia.
In total, the inventory of unsold homes (newly built and resale) is likely to be at an all time high. In a report just out, Standard & Poor’s, an international ratings agency, estimates that there are 1 million homes currently looking for a buyer, 500,000 of them newly built. One developer’s association recently forecast as many as 750,000 newly built homes on the market by the end of 2008.
Fewer, smaller mortgages
To understand the property market you also have to look at the Spanish mortgage market.
According to the INE, the number of mortgages sold in May fell by 36% compared to last year. Furthermore, the average mortgage value fell 6.6% to 140,861 Euros. Total mortgage lending (number of mortgages x value) was down 40%.
The average mortgage rate in May was 5.18%, a 10.8% increase on last year, and by the end of July, Euribor (the interest rate normally used to calculate mortgage payments in Spain) had risen to 5.393%, an all time high.
So, whilst borrowing costs are going up, Spanish lenders also tightening their lending criteria. The result is fewer, smaller mortgages, which helps to explain why the property market is shrinking as fast as it is.
Though developers are loudly blaming the banks for pulling the rug out from under the market’s feet, the fact is that many banks couldn’t lend more even if they wanted to. With one of the lowest savings rates in all Europe, and a current account deficit of more than 10% of GDP, Spain is heavily dependent foreign money. Right now, nobody wants to lend to Spain, and few investors are interested in Spain’s mortgage-backed bonds. As a result, banks don’t have money for new mortgages.
Spanish property prices
If demand is contracting, mortgage lending falling, and supply expanding, what, then, is happening to prices?
You would expect them to be falling, as they are in the UK, the US, and Ireland. But ‘Spain is different’, at least when it comes to official figures. According to their latest figures from the Ministry of Housing, average national property prices are still going up, by 2% in nominal terms over 12 months to the end of June.
That said, average prices did fall by 0.3% on a quarterly basis (Q1 vs Q2), the first quarterly fall since the 4th quarter of 1998.
The problem with the Housing Ministry’s figures is that nobody now believes them. A recent article by Reuters sums it up well. “I don’t know their methodology, but quite honestly the official statistics are no use to me. They don’t reflect reality,” Eduardo Vallejos, residential director at Kings Sturge, told Reuters.
For what they are worth, here are the latest price figures from the Ministry of Housing
And here is how they look on a graph:
We also have the Spanish property price index published by Kyero.com, a leading Spanish property portal, which looks at asking prices. According to Kyero, average Spanish asking prices fell by 0.1% on a quarterly basis, and by 3.2% over 12 months to the end of June.
But many agents report a different picture. Most of those that I have talked to say prices are down by at least 20%, and Santiago Baena, president of the COAPI real estate agents association, recently told the Spanish press that prices have fallen by 30% since Spain’s economic downturn began last year.
On the other hand, in a report just out, BBVA, one of Spain’s largest banks, forecasts that prices will go up by 0.8% in 2008, and then fall by 2.1% in 2009. The bank does say that prices will fall in real terms by 20% over the next 4 years, but most of that fall is expected to come from high consumer price inflation, not nominal falls in house prices.
So, on the question of prices, there are conflicting opinions. Transparency not being one of the Spanish property market’s strong points, it is impossible to give and accurate picture of where prices are going. The best working assumption I can offer is that prices in many areas popular with foreign buyers have fallen by around 20%, and are still on their way down, regardless of what the banks and government would have us believe.
Case study 1: The Costa Brava and Begur
The property market in Girona province, where the Costa Brava is located, is faring particularly badly. Transactions in May were down by 57% to 832, compared to 1,955 last year.
Part of the explanation of the Costa Brava property market’s problems lies in the province’s high property prices. According to Kyero.com, the average asking price in Girona province is 383,200 Euros, 160% above the national average, and only behind Barcelona and Mallorca.
The high proportion of holiday homes in the province is another factor. Holiday home purchases are often the first to go when money gets tight.
Buyer expectations of falling prices are not helping either. “Right now, buyers here are expecting prices to fall, so they delay their purchase,” explains Rosa Colón Plaja, head of Domus (www.domusbegur.com), an estate agency in Begur, an upmarket village on the Costa Brava. “It’s like a psychosis that is hurting the market.”
When enough buyers expect prices to fall, expectations become self fulfilling. “Prices are down 20%, and only vendors who are prepared to negotiate are selling,” says Colón.
The biggest price reductions are coming from developers who have to sell. “In some cases they are dropping their prices by 40% to 50%, but they tend to be isolated cases,” explains Colón.
Amongst private vendors, the British are more inclined to negotiate, as a strong Euro can offset a lower sale price . The other side of the coin is reduced demand from British buyers with funds in Stirling.
But, like other parts of Spain, the Costa Brava is not a homogeneous market. Some segments and areas are doing better than others.
“In Palafrugell, where there is a lot of new build, banks report that nothing is selling. But here in Begur, sales are still being made. It’s tough, but it’s not a disaster,” says Colón.
So, the bulk of the market has gone into a coma, but in the best, upmarket locations, like Begur, unique, attractive properties with strong selling points are still selling, albeit for discounts of up to 20%.
Case study 2: Mallorca
By some accounts, it’s a similar story of location and price segmentation in the Mallorca property market. According to local agents, the high end market – over 1 million Euros – remains buoyant, and though there are fewer sales in general, values are higher. The east coast of the island is reported to be having the best year ever, thanks to improved infrastructure and value for money on frontline properties. The segment said to be suffering the most is the cheaper end of the apartment market, especially in the south west and Palma, where buyers traditionally bought with a mortgage. Interestingly, the Germans have taken back the Island from the British, and now outnumber British buyers 3 to 1.
Bear in mind, however, that according to the INE, the property market in Mallorca has shrunk by almost 50% since last year – one of the worst declines in Spain. Such a dramatic fall in transactions suggests that the overall market in Mallorca is far from healthy.
The Spanish property market is in a slump, and I dare say we are closer to the beginning than the end. Standard & Poor’s latest report says the slump will be “long and painful”, and forecasts a prolonged decline in Spanish property prices. As Standard & Poor’s points out, even the Bank of Spain thinks that property prices are overvalued by 30%.
Will the slump end quickly? I doubt it. Consider the following downward pressures on the Spanish property market:
- Rising mortgage rates, tightening credit, and reduced mortgage lending
- A sputtering economy, with rapidly rising unemployment (to 10.7%, highest in the EU)
- Inflation at 5.3%, putting household budgets under further strain
- Expectations of falling property prices
- High-profile developers going into administration
- Falling household formation (divorce rate down by more than 30%)
- Immigration set to fall as the economy creates fewer jobs
- Property scandals and weak property rights turning off foreign buyers
- A monumental property glut
Are there any positive forces that might ride to the rescue in the short term? None that I can think of. If I am missing something, feel free to comment below.
Of course some people will make a killing in this market, they always do. Where there is distress there is opportunity.