Spain’s real estate problem is not so much a glut as too many homes in the wrong place, and too much red tape in the industry.
Talk to any well-informed insider in the Spanish real estate business and they will all tell you the same thing; there are too many homes for sale in the wrong location, and not enough for sale where people want them.
One of the nefarious consequences of a real estate boom is that punchdrunk developers start building in out-of-the-way locations, gung-ho lenders happily provide the financing, and hyped up investors start buying off-plan, creating a false sense of security. But when the bubble pops these developments are revealed for what they really – speculative projects based on cheap land. Nobody actually wants to live there.
It happens in the second half of every runaway real estate boom, and Spain was no exception (and Spain is a big, empty country, which exacerbates the problem). There are now thousands of lifeless new developments on the outskirts of provincial Spanish capitals and hard-to-reach locations near the coast. There is simply no demand for these locations at any price. Many of these homes will never sell, and some may have to be demolished, though that costs money too.
If all the new developments had been built in locations that appeal to some market segment, there would be no problem in the medium run. Where there is demand, there is a solution – it’s just a question of price.
In the short-run there is also an inventory of new developments for sale in great locations in Spanish cities, suburbs, and on the coast. There is strong demand for these locations, and all of these homes will sell in the next few years, many of them below their replacement cost. Then will come an acute shortage of new homes, as housing starts have collapsed, and the lead time in this industry is around four years at best. The only reason these homes have not yet sold is because of Spain’s economic crisis and credit crunch, both of which will pass.
Spanish Building costs will have to come down
That said, it’s not just a problem of too many homes in the wrong location, and not enough in the right location. Building costs in Spain are still too high, even after land prices have collapsed, in some cases to zero.
A recent article in the Spanish press highlighted this problem, citing the architect Gregorio Marañón Medina, and the Investment Manager Pablo Atienza, both industry insiders.
Whilst acknowledging the problem of too many homes in the wrong location, they also argued that the cost of doing business as a developer is now too high to make home building viable. And home building is crucial to the economy and employment, they point out.
House prices in many parts of Spain, including prime city centres, are below replacement costs (the cost of building new), often with land priced at zero. So even if developers could get financing, which they can’t, it doesn’t make sense to build if they have to sell at a loss (some upmarket projects do make sense now, but that’s a tiny segment of the market and a different story).
Building costs have come down in the crisis, including land prices, building materials, labour and professional fees (of architects in particular). But efficiency has not gone up enough, and taxes and licence fees are still far too high, argue Marañón and Atienza. Mainly thanks to taxes, licences, and complex building regulations and planning laws, most new developments in Spain would now be unprofitable, which is storing up an housing crisis in the not-too-distant future. As is often the case in Spain, the Government is a big part of the problem.
Until the national and regional politicians get it into their heads that they have to reduce the burden of tax and regulations on real estate, this crisis is not going away.