The Financial Times (FT) ran an article earlier this week saying that, with a glut of 1 million homes, Spanish house prices might have more room to fall, and that price adjustments could take another “two or three years to play out.” No news there, but it was interesting to read how one real estate professional divides the glut into 3 categories with very different sales prospects.

“First you have the residential units that have been completed and are empty but close to major cities,” explains Stephen Newman, chairman of property services group Aguirre Newman in Madrid. “With these, it’s simply a question of patience and price adjustment and within 18 months to three years most of that stock will have been absorbed.

“Then you have the second category of residential units that have been completed in what are probably absurd locations – these properties represent a major headache for the banks which are forced to take them on.”

The article doesn’t say it, but many of the properties in “absurd locations” were built as holiday homes. For example golf projects in the middle of nowhere in Murcia, or those enormous blocks of flats you see on the wrong side of the motorway on the Costa del Sol.

Land is the third category, with “sharply differing value according to zoning classification, location and state of readiness for development,” says the article.

No joke. What many people don’t know is that, during the boom, the real game in Spain was land, not all those off-plan flats that ordinary punters invested in. Fortunes were made gambling with land, and many corrupt politicians stuffed their pockets in the process. But now the boom has turned to dust, land values in many areas have collapsed, and the banks are left holding the baby. Prime building land in places like Madrid, Barcelona, and the best coastal spots, still has a market, but much of the land bank is simply worthless.

On the subject of land, the government is throwing the banks a lifeline this week by extending the period developers and banks can hold land before it reverts to a rural classification. Thanks to the new rule, introduced this week by executive decree, then can now hold land for 3 years more without developing it, and without it being reclassified as rural land. That gives banks a total of 6 years before they are forced to take the hit and value land as rural rather than urbanisable.

Back to the glut and what will become of it, another expert makes the same point that the market needs to be segmented. “There is a tendency to think that there is a big problem of oversupply,” says Frédéric Mangeant, head of Knight Frank in Madrid. “This is true, but not in all zones and all categories.” He also told the FT that “developers have begun dusting off plans for small upscale housing estates on the capital’s periphery,” suggesting that the residential constructions sector is starting to see some green shoots.

Holiday home market bouncing back?

The article also claims that foreign demand for holiday homes is coming back to life. “On Spain’s overbuilt Mediterranean coast, heavy price reductions have also started to revive interest among Britons and other northern Europeans looking for holiday homes or second residences.”

Is this true? Well, I can see that the market is not dead in some segments and areas. But make no mistake, the mass market is still in deep trouble. I’m working on some detailed sector research so I’ll be able to tell you more in a few months’ time.

The article also reports that “Second-hand homes in sought-after areas around the country have also resisted sharp price corrections,” according to property agents. That depends how you define “sharp price corrections”. I consider an average of 25% peak-to-present in popular areas pretty sharp. To the best of my knowledge, prime holiday home prices have fallen by at least that much since the peak. I’m talking about transaction prices, not asking prices.