House prices were overvalued by as much as 37% in 2007, at the height of the real estate boom, argues a new report from Jiménez de Laiglesia, a real estate consultancy based in Valencia. Property prices must come down to return the market to balance, but despite recent declines, prices are “still only half way there,” says Jiménez de Laiglesia.
House and land prices are heading down, but since their peak in 2007 house prices have only fallen 15%, urban land by 21%, and building land outside cities by 25%. To return the market to balance house prices must fall another 22%, urban land 53%, and building land in other areas 62%, all in the next 2 to 3 years.
This will wipe out developers who overpaid for land. “Practically all who bought land after 2003 and 2004 can’t cope with the these reductions,” says Jiménez de Laiglesia. “In the end this product will have to be sold by the banks. They can afford this drop in prices, as it wipes out the margin of the developer, and they can even drop prices a bit further, for although they would lose money, they get back liquidity.”
Boom and Bust
One of the clearest signs that the Spanish property boom is over is the fact that planning approvals have fallen from 600,000 in 2007 to 100,000 this year. This as a necessary step to help the market digest Spain’s excess housing inventory and return the market to balance, argues the report.
Another indicator is the fall in Euribor, which the report’s author describes as “the first bit of good news” for the sector. But it comes with a warning: As an exceptional measure to create liquidity, low interest rates won’t last.
Another sign of the change in cycle is improving housing affordability, which has fallen from 51% of household income last year to 30% this year, thanks to lower interest rates and falling property prices.
Subprime in Spain
The report draws attention to Spain’s very own ‘subprime’ problem; the 150 billion Euros borrowed to buy land. “We are talking of 150 billion Euros in loans for building land that now has a very different value to when it was financed,” the report’s author explained to the Spanish press.