The majority of primary homes on the market are still overvalued if compared to potential rental prices, finds a study by the Spanish Consumers’ Association (OCU).
Carrying out research for a buy-to-let study the OCU has been tracking the relationship between house prices and rents for years in four Spanish cities: Madrid, Barcelona, Seville and Valencia.
“We work out net income [after subtracting rental expenses], which we then compare with the income from a sensible investment at a long-term fixed rate,” the OCU explain. “Despite accumulated property prices drops since 2008, the vast majority of areas studied still offer poor rental returns,” they conclude.
“Property prices continue to remain disproportionately high compared to rental rates, which is like saying that property prices are still overvalued in our country,” says Lleana Izverniceanu, and OCU spokesperson.
According to the OCU’s research, just seven per cent of the homes included in the study of 300 Spanish neighbourhoods offered worthwhile rental returns, whilst 85 per cent of properties are still so expensive that OCU’s advice to investors is stear clear.
Madrid is no exception: only two per cent of the neighbourhoods analysed are worth investing in. For example, in Ríos Rosas, property prices are classed as “very expensive” and in most parts of Chamartín, prices are “expensive” and “very expensive”, leading the OCU to recommend selling up in both districts. OCU only recommend investing in 3 of the 125 areas studied in Madrid: two belong to Puente de Vallecas district, and the third to the airport neighbourhood in Barajas district.
To identify the safest rental investments, the OCU compare net rental incomes with a benchmark long-term, risk-free interest rate. “To do this,” they explain, “we need to work out the minimum investment threshold required because property rental has expenses and is riskier than other long-term investments”. Unsurprisingly, their latest study on rental risks reports that 30 per cent of landlords have had problems with non-payment or damage to the property.
What, according to the OCU, is the minimum return investors should expect from property? In their opinion, five per cent net per annum is the minimum rental investors should expect if they are to invest in Spanish buy-to-let (long-term lettings) in Spain’s four biggest cities.
HOUSE PRICE CRASH NOT OVER
Nor are the OCU optimistic about capital gains making up for poor rental returns. “We don’t expect property to regain its value significantly in the medium term, as it did 10 to 15 years ago”.
“Some experts argue that thanks to the accumulated price drops, property prices won’t fall any further,” says Izverniceanu. But bearing in mind the persistent imbalance between house prices and household incomes (known as the affordability ratio, the historic average is 4x gross household annual income), the fact that house prices are still above what they should be judging by long-term inflation, and the glut of properties on the market, the OCU argue that house prices have not finished falling.
“All these factors lead us to believe that in spite of the falls in prices the housing market is still considerably overvalued,” says the OCU spokesperson.”The reality is, in the medium term, the house price trend will continue falling,” conclude the OCU.
It should be noted that OCU are talking about prices and yields for the primary housing sector in Spain’s four main cities. They are not talking about the second home market in coastal areas, where tourist rental yields vary enormously, and where it’s difficult to determine an affordability ratio.