For the last year or more it has been possible to buy new property in Spain for less than it costs to build, thanks to a housing bust that has forced banks to take over thousands of new developments, and repossess hundreds of thousands of new or recently built homes. Such low prices are a once-in-a-cycle situation that will not be repeated again, at least not until the next boom and bust, which could take decades.
When the Spanish housing bubble burst in 2008, banks were forced to take over hundreds of thousands of new homes as countless developers went bust. According to recent research by the Spanish daily El Mundo, bank stocks of new homes for sale now include properties on offer for as little as €20,000, including a parking space.
El Mundo conduct a study of properties offered for sale by banks, searching for the “cheapest new flat for sale in Spain.”
Solvia, Banco Sabadell’s property division, took the prize for the cheapest new flat in Spain. They were offering a 44m2 one-bedroom flat in Mollerussa (Lerida province, Catalonia) with a terrace, double glazing, mains gas, and a storage room for €20,100. This property, never previously occupied, is for sale for just 456 €/m2, which is significantly less than building costs for a cheap property, even if you give the land it’s built on zero value.
Aberis, Barclay’s property division, wasn’t’ far behind a one-bedroom flat with 65 square metres in Yepes, Toledo province, for €20,900. With excellent transport connections, central heating, storage space, private parking, communal areas with a swimming pool and children’s playground, this was one of the most attractive bargains available in Spain. Looking at the price per square metre, at 322 €/m2, it’s even cheaper than the Solvia flat in Mollerussa.
Not only are there thousands of newly-built properties for sale in Spain below their replacement costs, but there is further room for price reductions in negotiations. It depends on the bank and the property, but some will give further discounts of 10 per cent or more to close a sale.
A few weeks ago, Solvia sold a property in Ocaña (Toledo province) for just over €17,000. “In this particular case the price included a further discount if the owner took out a mortgage with our bank,” a Solvia representative told El Mundo.
How much does it cost to build a residential property in Spain that complies with building regulations? You can’t really do it for less than 500 €/m2 at the cheap end. Then you have to add on the cost of land, which in boom times used to account for 50 per cent or more of costs, though now has fallen to between 15 and 30 per cent, depending on where you build. So there are thousands of properties for sale in Spain that can be bought for less than they cost to build, implying that the land they are built on has no value.
Why are banks, in particular, selling homes in Spain for less than they cost to build? Because deep discounts are the only way to sell much of this property, and after seven years of crisis, banks have written off enough to be able to sell below replacement costs. Also, because banks are so bad at selling property, the only way they know to sell is by discounting. Of course, this is terrible new for private vendors, who have to compete with banks for buyers.
You could argue that much of the Spanish housing glut has no market at any price because it’s poor quality in the wrong location. There is some truth to this, especially in the interior of Spain, where a declining population compounds the problem of low demand. But in coastal regions that benefit from international demand it should be possible to sell everything over time, it’s just a question of how long it takes. Recovery would be quicker if the market wasn’t in the hands of banks, who are possibly the least competent property sales organisations on the planet.
Sooner or later most of the stock will have sold, after which we will never again see so much Spanish property for sale at these prices. Once these properties have sold, there will be no new building to replace the supply of new homes on the market until prices more than double to cover building costs, land costs, and a developer’s margin. Nobody is going to build to sell at a loss.
It also means that, whilst the Spanish property market is flooded with these kind of newly-built properties for sale below replacement costs, there will be little or no building of new homes. Now we have an excess of supply, but one day there will be a shortage of new homes, and who knows what price dynamic that will trigger.
When the current stock of distressed Spanish properties is sold I doubt we’ll ever see these prices again.