With new data indicating prices drops are starting to slow, property industry analysts are busily trying to predict when the market will finally bottom out. While there is no consensus, most experts agree the end of the downturn is still many months or years away, despite the recent run of positive headlines.
A new report from RR Acuna paints a pessimistic picture. Although improving labour market conditions and slightly growing economic growth will improve housing demand, there are still fundamental issues that will not be resolved in the short term, including the continued growth of the stock of repossessed properties.
Banks own about 20 per cent of the supply of homes on the market and they are facing increasing pressure from the EU to reduce their exposure to real estate, Acuna notes. Given the direction of the market, the only way for the banks to unload property is reduce prices, which will add a further drag on the overall market.
For the banks, there is another ticking time bomb on the horizon: The end of a holiday on capital ratios mean that 30 per cent of real estate companies will have to be wound up this year, with their assets passing to the lenders who own the notes, RR Acuna says. That means yet more real estate assets heading for bank balance sheets.
While the growth of foreign buyers will help, the domestic market will still face issues. The elimination of mortgage tax relief means that the housing affordability ratio published by the Bank of Spain actually deteriorated by 24 per cent to 33.2 per cent for the average home buyer, RR Acuna notes.
The end result: no bottom in the near future. Inventories may stablise or even rise, with prices continuing to fall and only the cheapest homes selling, RR Acuna forecasts. Excess supplies will continue pushing down prices through 2016, the firm says.
Meanwhile, Alfa Inmobiliaria, one of the largest chains of estate agents in Spain, hits are more optimistic note, forecasting that house prices will rise in some areas and segments in the short term. But the outlook for the overall market remains bleak.
Alfa cites three main reasons for optimism, according to coverage in El Mundo, the Spanish newspaper.
1. High rental yields. In some areas yields, where property cost as little as €60,000 after seven years of falling prices, yields can hit as high as 9 per cent, with rents at about €450 euros a month. That should get the attention of investors. For example in San Sebastian de los Reyes, in Madrid. With bank deposits offering paltry returns, Spanish investors are already turning to property, Alfa notes.
2. Spanish house prices have fallen more than 65 per cent in some areas, making property an attractive investment again. Homes that cost €240,000 in the boom can now be had for as little as €85,000 in areas like Arganda del Rey, in Madrid. Spanish incomes have fallen, but not as much as house prices, meaning that the purchasing power of small investors has risen and this, allied with the improving economic outlook, makes property a good investment, according to Alfa. Of course, The problem with this argument is that it doesn’t apply to anyone other than cash-buyers who have equity to invest. Spaniards without savings need mortgages, but banks still haven’t opened the mortgage taps, and borrowers no longer benefit from mortgage tax relief, as recently pointed out in a report from Citigroup, forecasting further house price declines.
3. Banks are lending again. Alfa believes the banks are starting to offer mortgages again, albeit cautiously, and only in select cases. They are lending up to €150,000 euros with rates of euribor +1.75%, meaning rates of 2.25 per cent. So for a home costing 60,000 that means monthly repayments of €315 euros per month with a 20 year mortgage, assuming a debt ratio of 30 per cent, needing an income of €1,100 per month. In 2007 a similar borrower would have needed an income of €4,845 per month.
“Prices, in the context of the supply today, will start recovering principally in places where buyers are best placed to acquire a home, or where investors find the best deals to get a good return in the short and medium term,” Jesus Duque, vice president of Alfa, told the paper.