Forget the Bottom, When Will Property Market Hit Normal?

Analysts are peering into their crystal balls hoping to predict the bottom of the Spanish property market collapse, an exercise which serves as a stark reminder of one clear, indisputable fact — the market hasn’t hit bottom yet. Prices are still falling and there is no guarantee the slide will stop anytime soon.

In one of the latest attempts to predict a bottom, Fitch Ratings pegged 2015 as the year when the market turns around. “When house prices reach their lowest point, which we don’t expect to happen until the end of this year 2014, it’s probable they will have fallen 40 per cent in nominal terms since the peak,” Fitch reports.

Fitch‘s conclusion is similar to recent reports. And, like other analysts, Fitch was quick to hedge, noting that there are several economic factors, such as unemployment and the reluctance of banks to offer mortgages, which would quickly derail any bounce.

For practical purposes, trying to define a bottom is folly. In the reality of the market, some areas will find a bottom while others continue to slide, a phenomenon that is already occurring in Spain. The idea of an identifiable bottom is a myth, nothing more than fodder for pundits and analysts.

For investors and industry executives, the far more interesting goal is normalcy – a functioning, stable market. There is a big difference between a market that has reached bottom and a functioning market. In a functioning market, sales are occurring, homes are appropriately priced and lenders are supporting purchases. A normal market exists when a well-priced, well-located property finds a buyer in a reasonable amount of time.

Signs of Normalcy

There are signs that many markets are approaching some semblance of normalcy, even if it might be a weird normal. In markets where there is high demand and low supply — the high-end Balearics, Barcelona and Marbella markets, for example — it is already difficult to find quality properties for sale, especially since there is no new supply coming on line. The buyers might be from Russia or Norway, but well-located, well-priced homes are selling.

In some areas, there are already tiny signs of development “green shoots.” In the Costa Blanca, small developments projects are under construction, and Corp is finding success with affordable apartments in Barcelona. A recent report suggested the construction industry will hit bottom this year.

But most markets are a long way from normal, by any reasonable analysis. Consultancy RR Acuna de Asociados estimates there are more than 1.7 million houses for sale in Spain. Even in an improving environment, it is going to take years to whittle down the supply at current rates. Two years from now – long after the market hits “bottom” – there will still be 1.5 million homes available, Acuna estimates.

In terms of signs of normalcy, the recent report from the Sociedad de Tasación may have been the bluntest. Sure, there are positive indicators of price decline “moderations,” but there are “still no reliable signs of recovery,” the valuations firm concluded. Most telling, the company reported no evidence of a “significant” improvement in the level of demand, and “the industry is still waiting for the housing credit to start flowing.”

That viewpoint was substantiated a few days later by estate agent association API, which reported that agents were seeing no real signs of recovery, despite the positive reports.

For Spain to see normal, the banks are going to have to start lending and the Spanish economy will need to improve to resurrect the domestic market. And there is little to indicate that either of those things are happening now, most analysts agree, if you read between the lines.

Lending support, a key variable to a normal functioning market, remains at historic lows, even though property prices are showing signs of stablilisation. If the banks won’t support current values, it is unlikely buyers are going to show enthusiasm for the market. And with unemployment still hovering above 25 per cent, the property industry is unlikely to see much boost from the domestic market in the short term.

The negative reports don’t mean the market isn’t getting better, it just means it’s a long way from normal.

Source:Sociedad de Tasación