Higher property prices leads to International Monetary Fund early warning

There’s no doubt the Spanish Property Market is in better health than at any time in the last decade. The domestic market is growing again and the overseas market is at record levels. In fact, there are already 25% more foreign buyers in Spain in 2019 than at the peak of the market before the 2008 crash and they represent an 18.7% share of the total market. That’s more than double the market share before the crash. However, the property market remains patchy, very buoyant in some regions but flat in others.

This becomes clear from the breakdown by area of the latest statistics from the notaries. We know that in the current market 60% of all purchases in Spain occur in the Mediterranean regions on the mainland and in the Balearics and Canary Islands. That’s been true for several years and is not surprising, given the strength of the overseas market, as these are the regions that the majority of foreign buyers head for. However, closer analysis shows that 47% of all overseas purchases were in just two autonomous regions, the Comunidad Valenciana and Andalucía, so it’s clear there is more activity in some regions and less in others.

And there are notable differences within regions as well. About 20% of all property purchases in Spain, domestic and foreign, happen in Andalucía. However, although Andalucía has eight provinces 33% of the region’s transactions occur in just one province, and that’s Málaga. And 45% of these deals are in the city itself, plus Marbella, Estepona and Mijas. So the trend is the same; lots going on in some places, not so much elsewhere.

Strong growth in some overseas markets is balanced by falls in others, most notably Cataluña, with 5.3% fewer overseas buyers while in the Balearics there was an 11.2% decrease. The independence issue is likely to be part of the explanation in the case of Cataluña but I find the decline in the Balearics harder to understand. Higher prices fuelled by lack of supply is one possible reason.

So, I was interested to see a report issued by the International Monetary Fund in December 2018, warning about early signs of a ‘slight overvaluation’ in prices. The report also noted that Spanish banks are highly exposed to real estate sector developments and may underestimate the speed at which house prices and relaxed lending criteria can gain traction. The IMF was particularly critical of the lack of progress in setting up a monitoring agency. It has been urging Spain to do this for years, ever since the 2008 banking meltdown. The last government put this on hold but the current PSOE administration is working on legislation to give the Bank of Spain the necessary powers. This same report puts average price rises between 2014 and 2017 in the region of 15% nationally. However, in the prime spots important to the overseas market I would put the increase at closer to 25% in that period.

Also in December 2018, I noted warnings from valuers about the spectre of overvaluations creeping back into the market. Given that most banks currently offer maximum loans of 80% LTV, those without a large deposit are effectively excluded from the market. In reality, it’s been more than a tendency, most banks have been ordering valuers to be conservative.

So, the IMF comments about ‘slight overvaluation’ in prices or the emergence of deliberate mortgage overvaluations are a bit worrying. They may be only a gentle warning but they may also be the first signs of something more serious. Even more reason then for buyers to be cautious, particularly in the new-build market. In the case of the resale market, while lack of supply of top quality well-located properties is an issue in all the most active regions, there is no sign that buyers are prepared to pay excessive asking prices. In my experience they are much more likely to walk away than overpay. However, that is not the case in the new-build sector. In some instances we are seeing buyers already paying 30% more per square metre than at the peak of the pre-crash market even though resale prices in the same areas are still as much as 25% below those peak prices.

Consequently, I see problems ahead as some of these new-builds start to appear on agents’ listings as resales. Sellers will find out they can’t ramp up their asking price over and above what the resale market can stand just because they paid an inflated price when they bought. The alternative will be that their property languishes on the market for years. I’m concerned that some buyers are succumbing to what an agent friend of mine calls ‘candles and cushions’ marketing, lots soft focus images, all very seductive, but much better to check the price. In my view, the levels already being seen in some areas are unsustainable.

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