The Spanish property market has always been very varied. Each region, province, city, neighbourhood and even every street is a property world of its own. This hasn’t changed but what has been noticeable over the last few years is the unevenness of the recovery with Barcelona and Madrid well ahead of the rest.
Adapted translation of an article originally published in the Spanish daily El Mundo.
Up until now, the difference between markets had generally been relatively small. This is particularly true of large cities where price differences were moderate. There had always been more or less uniform growth with the largest cities setting the pace. But now the market has become polarised.
Barcelona and Madrid are driving the recovery backed by improvements in the economy and employment, and some areas are being left behind. This means that no one should jump to the conclusion that price rises are taking place across the country.
The different market speeds are clearly shown in the Tinsa Local Markets Index for Q3. As well as noting that average prices for new and resale property have gone up by 4% year-on-year throughout Spain to reach €1,258 per square metre, the report from the valuation company offers data on a wide range of property price increases and decreases in regions, provinces and cities.
At a regional level, Tinsa reports that prices went up by 13.2% and 12.5% in Madrid and Catalunya, respectively. On the other hand, they dropped by over 3% in Castilla La Mancha and Extremadura. The same happens at provincial level with two-digit price rises in provinces in the Madrid and Catalunya regions, and falls over 4% in Palencia and Ciudad Real.
Still room for big price adjustments
But the biggest differences are seen in Spain’s largest cities. Property went up by 20.6% in Barcelona and by 15.5% in Madrid, figures that contrast dramatically with the enormous adjustments in Ciudad Real (-9%), Zamora (-8.5%) and Cáceres (-8.1%). While Spain’s two largest cities drive the property market, in most cities prices have not changed at all and in over a dozen of them they’ve actually gone down.
This scenario leads to obvious question of what’s going on and what will be the consequences of these prices variations. For the experts, the answer is obvious – this situation is clearly the result of the law of supply and demand, with the latter driven by investors looking for profitable buy-to-let properties. They also believe it’s a good thing and keeps the property market in good shape. They also point out that since the Spanish market is free, it has the capacity to control itself.
“There are markets where demand is still very low and any improvement leads to price stabilisation either as lower prices or simply no change,” explains Jorge Ripoll, head of Tinsa Research. “But at the same time, in busier markets because of economic activity – mainly Madrid and Barcelona – two buyer types come together: the usual property buyers plus investors, keen to buy because of low interest rates and buy-to-let returns. This explains the different speeds within the market.”
José García Montalvo, senior lecturer in Economy at the Pompeu Fabra University, claims that the different property market speeds are justified if you look outside Spain. He sees the situation as “logical and normal. It happens in many countries – London is a case in point. Some local markets indicate what’s about to happen in a country”.
José Luis Ruiz Bartolomé, a property consultant and partner at Chamberí Asset Management, also uses “normal” to refer to the different speeds of recovery. “Our experience shows us that there are circumstances that mean some markets react more quickly than others. These tend to be the local economy and its job creating capacity, the second home market, foreign demand and whether there are more or less solvent buyers and investors,” he says.
For Ruiz Bartolomé, “this is not a good or bad thing”. “The market reflects supply, demand and the economic strength in every single city,” he says. “The abnormal thing would be the opposite and that’s partly what happened during the property bubble.”
He points out that then “prices and sales rose across the board and became top heavy. They didn’t reflect local demand or the economic situation”. In his opinion, if something like this happens, we will see “artificial price inflation based on the spread of cheap debt”.
Beatriz Toribio, head of Research at the property portal Fotocasa, wouldn’t call the different market speeds “advantageous”, but she does see them as “positive” because “they’re based solely on demand whereas before, with excess credit and speculation, supply was the dominating factor”. She believes that the property sector is in better control because it is affected by fewer external factors. “Things are now in their proper place,” she says.
The new-build sector also has several markets, according to Daniel Cuervo, secretary of the Spanish Developers Association (APCE). “Even individual neighbourhoods within the same suburb are different for developers,” he says. “In our sector, we need to carry out a thorough study of location, supply, demand, purchasing power and property type and price, as well as legal viability.”
Cuervo emphasises that price variables are a basic concept and explains the new-build prices are rising for several reasons: the increase in land values; the increase in production costs; and more competition between developers to buy land. The fact that some areas are doing well and some not so well from a developer’s point of view doesn’t condition the type of property or developer. “The product is the same in terms of quality and efficiency, and in all markets there are small and large developers,” he says.
As far as sustained growth goes, Toribio believes that it’s vital for supply to adapt to demand. “In some areas there’s a shortage of new builds,” she says. “To avoid price overload, the authorities should be quicker in freeing up available land.”
The “oil stain” that’s not spreading everywhere
García Montalvo uses the expression “oil stain” to refer to how recovery is spreading beyond the larger cities. So far, this hasn’t happened at the expected rate. “The problem is the lack of mortgages, which stops the spread of price rises,” he says. He points out that mortgage approvals are much more stringent. “Families have to prove their financial worth. Investors have to show high returns, which can only be achieved in big cities or popular tourist resorts. And developers have to show high levels of pre-sales and proof of land ownership,” he says.
Regarding the price changes in Barcelona and Madrid in the Tinsa report, García Montalvo is not only cautious in his interpretation but rules out the risk of a bubble. “For that to happen,” he explains, “two things would have to take place: that prices didn’t match the asset’s return and that mortgage lending increased. Neither of these is happening. With rental returns of 5.5% to 6.5% in Barcelona, house price increases are more than justified (at the height of the last property bubble, rental returns were 1.5% to 2%). And lenders are not offering large volumes of loans,” he says.
Ripoll also emphasises that price changes in Barcelona and Madrid “are the result of supply and demand”, and most of all, because of the strength in purchases. “You only have to compare the average time to sell a house of 3.2 months in Madrid and 3.4 in Barcelona with the 9.1 months for the rest of the country,” he says. He also attributes the significant price rises to “readjustment as prices bounce back from record lows”.
Looking to the future, Toribio forecasts normalisation within the market, which leads her to believe that as property prices recover more obviously they will settle down. However, she points out that Madrid and Barcelona, as is the case in other European capitals and large cities, will always be one step ahead of the rest of the country in terms of prices and in property activity generally.
As regards a cooling down in the Madrid and Barcelona markets, Tinsa plays down the consequences because they would have nothing to do with those that caused the bubble to burst. “Sales are taking place mostly without mortgages because buyers are investors or using savings,” says Ripoll.
The gap will widen
Looking at the other end of the market, Ripoll argues that in Ciudad Real, Zamora and Cáceres precisely the opposite is happening. “These are cities with weaker demand, less economic activity and where adjustments, both up and down, tend to happen later. These are markets that have yet to bottom out,” he says. In any case, he forecasts that “price drops in these cities will level out as has happened in the rest of the country”.
The excess supply of new builds in certain areas and the banks’ reluctance to approve mortgages leads García Montalvo to believes that the different market speeds will continue for some time. And he warns that the gap will widen since rental returns and property appreciation in large cities are considerably higher than in small and medium places. He also points out that secondary markets are not expected to double or triple their population as they did between 2005 and 2007, and he therefore rules out the availability of loans for large construction projects.