Feast or famine for Spanish property market, now glut is biggest problem

A local business school recently estimated Spain’s glut of newly built homes at around 1 million, suggesting that this is the biggest problem facing the Spanish property market today. Now a new report from the Ministry of Housing confirms that Spain’s property glut is indeed monumental, even if it has not yet hit the 1 million mark by the Ministry’s count. But given the rate at which new homes are being finished that figure won’t take long to reach.

Developers, bankers, academics, and politicians all agree that the Spanish property market won’t recover until something is done about the glut of new homes. Unfortunately, that glut just keeps getting bigger.

According to the figures compiled by the Ministry of Housing, the stock of completed but not sold new homes stood at 400,000 units at the end of 2007. By the end of 2008, it had risen by more than 50% to 613,000, confirming 2008 as the year in which the Spanish property bubble well and truly burst.

To make matters worse, there pipeline is still bulging. A lot of the new homes started in the final years of the boom are now close to completion. The Ministry estimates that there are 385,000 homes in the final stages of construction with no buyer in waiting. The way that builders are running out of money some may never be finished, but most will be completed and then join the other 610,000 thousand odd properties languishing on the market in search of a buyer. That means that Spain’s glut of newly built homes will soon be 1 million strong.

How long will it take to liquidate the glut? Last year developers sold 285,000 homes, and if that rate continues it will take 3&1/2 years to get rid of the excess inventory. Some experts argue that a significant chunk of the inventory will never. “Some developments will not sell even in 15 or 20 years,” one real estate consultant told the Spanish daily El Pais. “They will have to be knocked down because maintaining them is too expensive.”

Another problem is that half of the stock of unsold new homes is located on the coast, and much of it was built as second homes, a market that will take longer to recover. Everyone needs a home, but nobody really needs a holiday home.

The report from the Ministry of Housing also identifies a potential problem for the future, perhaps unimaginable at this stage in the cycle. Last year there were just 210,000 housing starts, and this year there will be less than 150,000, largely due to the credit crunch cutting off funds to developers and home buyers. Spain is thought to have ‘normal’ demand for between 400,000 and 450,000 new homes a year, so once the glut has been digested Spain will have the opposite problem – a dearth of new housing.

Feast or famine seem to be the only alternatives for the Spanish property market.

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