By Campbell Ferguson, FRICS
I’ve been criticised recently for being too pessimistic and of talking down the market following two articles published here (Home-building boom on the Costa del Sol, but is it sustainable? and Insanity: doing the same thing over and over again and expecting different results) in which I’ve warned of a local property bubble on the Costa del Sol leading the market over the same cliff edge it’s crashed from many times before. In economic isolation, as long as the money keeps coming, the developers will keep on building, as that’s what they do. However, the problem arises if there is an international crisis and the money stops, and that’s what concerns me. I don’t believe the local building boom is sustainable, which means another Spanish property bubble waiting to burst at the slightest prick from a financial crisis, which the IMF warns may be on the way, as reported in this Guardian article.
Risk of over-supply driving down Costa del Sol house prices
Looking around the Costa del Sol at present there is so much resale property available, and yet builders are piling on more new accommodation. Even without an external shock like an international crisis, the laws of supply and demand suggest that the value of all properties will drop as current owners get more desperate to sell and lower their prices. The price differential between resales and off-plan is currently substantial and increasing, but eventually potential buyers of new homes will come to their senses and see they can get much better value from resale homes than new homes that are immediately worth less than the purchase price, especially when transaction costs like taxes and agency fees are taken into account. When that happens, the builders will have to discount their prices to compete with resale prices, driving down the overall value of property in the area.
But another boom and bust on the Costa del Sol can be avoided, or certainly reduced, by prudent construction guided by accurate occupier demand, rather than investor-led demand. Surely, it would be more sensible to stabilise the number of properties being built, and thus sustain the values of the existing property collection, avoiding wastage of resources, and ensuring that owners and buyers can be economically secure? And that, of course, is the same for the builders and their employees and their financiers. Ignoring the local politics, the benefits of restricting a headlong rush to build can be seen in the experience of the Balearics, which has a very strong anti-development policy that was a major reason for their property market not crashing nearly as far as the rest of Spain in the recent 10-year crisis. The value of the existing property has probably risen due to supply more equally matching demand, but at least there is less disastrous collapse of personal and financier wealth with the highly unpleasant consequences for all involved.
With the weight of money in the world, largely built of very shaky foundations, the tap is unlikely to be turned off there. With individuals and families seeing the equivalent of lottery wins in the sale of land, that’s not going to stop. In between, we have the politicians and local authority planners and economists, and they are the only ones who can bring sense to the glut of permitted building. Do they have the political will or courage to do so, even if they can see that it makes sense? Well, their record on anything except short-term benefits and votes does not give any hope at all.
Property valuers caught in the middle
For property valuers, we have to follow the market up as that’s what the comparable evidence shows. The Bank of Spain appears to try to control lending by varying its instructions to tasadores (valuers), when it really should be left to the banks to decide what loans to value they are comfortable with. However, to avoid a perception of manipulating a ‘free’ market it’s easier to frustrate buyers and lenders by enforcing low valuations when they want to hold the market back, and encouraging higher values when things get too sluggish. The EU is pushing the idea that valuations shouldn’t be taken at one point in time, but look at a time-spread of values in the past and gazing into the future. For valuers, that’s a sure recipe for claims against them as future thinking is bound to be based on the past graph extending along similar lines and thus them being caught out, like everyone else, every time the market dips or rises.
So, let’s all keep going in the short-term, and hope that if and when the collapse comes, we’ve sold at the peak and can wait with our profits to invest them again when the market bottoms out. That’s all we can hope for in this big world economy rollercoaster.