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Here are my reasons why the Spanish property market won’t recover, well for at least twenty years or so.
The over reliance of the Spanish economy on the construction sector. The construction industry made up 16% of the GDP of Spain in 2007 whereas the european average is 6%. This massive reliance on an industry that has almost been wiped out by the recession means that there is a huge hole in the Spanish economy that will be difficult to fill with any other kind of industry. Spain does not have much in the way of industry and has not invested enough in creating a diverse economy and is too dependant on construction and tourism. The Spanish economy is also very inefficient in that generally speaking the Spanish are too laid back and have a cavalier attitude to getting things done.
The over reliance of the Spanish economy on tourism is a problem. Most of the work in the tourist industry is seasonal which means that people work during the summer months and then don’t work the rest of the year and have to rely on their earnings made during the summer to get them through the rest of the year. People who work in the tourist industry are unskilled and low paid and the work tends to be part-time as well.
During the ten year long housing boom many homes were built and this has resulted in there being around 1.6 million unsold properties in Spain, with a lot of this stock concentrated in the coastal areas of Spain with many ghost urbanisations dotted around the costas where people don’t want to live and where there are few buyers of property. This vast over-supply of vacant properties on the market is the single most important factor that will drag down property prices in the future. This number is only set to rise as more people who hoped for a recovery see things getting worse and decide to bail out and put their properties up for sale adding to the supply of properties already out there.
In the run-up to Spain joining the Euro alot of money that was earned illegally or not declared to the tax man was being laundered by buying property in Spain and this helped to fuel the property boom. Whole estates sprang up based on money earned through drug trafficing alone. As home prices are falling the people who laundered their money by buying property will decide to get out of property before house prices fall any further and will sell their properties adding to an already huge supply of properties which will depress prices even further.
It is inevitable that Spain will drop out of the Euro and adopt the Peseta in three to four years time and this will lead to a massive devaluation in the value of the Peseta by as much as 50% to 60%. In the run-up to this event there will be a huge stampede of people who own property in Spain who will try to sell their properties before they end up being valued in worthless Pesetas and this will add to the supply of properties on sale depressing prices further.
Many properties were built illegally during the boom on rustic land, land fit for agricultural use only. Some properties has already been bulldozed and others are awaiting their fate. Spanish law tends to be slow, incompetent and even corrupt with regards to property purchases. Owners of property sometimes don’t know where they stand as far as the Spanish legal system is concerned. There are few regulations that protect the interests of home owners and when the regulations do exist the legal authorities are sometimes reluctant to enforce them. The Spanish legal system is an absolute nightmare and is in urgent need of reform but regrettably it is never going to happen.
Too many properties were built during the boom that are of poor quality, shoddy workmanship and not built to meet standards or comply with regulations. Sometimes poor building materials were used in the construction of properties. Poor drainage and no damp proofing are common problems together with subsidence and cracks appearing in walls. These problems appear most commonly during Winter after a prolonged period of heavy rain.
The transaction costs when buying a property in Spain are high and this could put many people off from buying property in Spain. When buying a property you have to pay a sales tax of around 10% together with the legal fees and you have to pay half the estate agent fees. What also puts people off from buying a property in Spain is that they fear that they might be getting ripped off and many think that estate agents and Spanish lawyers/solicitors are crooked and corrupt and are out to fleece the naive home buyer.
There has been considerable controversy surrounding the Valencia LRAU land grab law. The LRAU land grab law applies only to the area under the juridiction of the Valencia state government. The Valencian government passed the LRAU land grab law to speed up urban development in 1994. The law was brought in so as to utilise the large quantities of what appeared to be, ‘neglected or abandoned land’, classified as ‘rural’ (non urban). The law was intended for the purpose of acquiring this ‘Rural (non urban)’ land to be used to improve local amenities, ensuring developments were built with sufficient public services and facilities such as water supply, sanitation, roads, green spaces, and provide affordable housing for workers on areas of land that where totally undeveloped. The Spanish land grab law was badly drafted and enables property developers to ask that land be reclassified from rural to urban without the owners’ permission. Subsequent abuse by unscrupulous developers has resulted in some property owners having their land compulsorarily purchased, at prices far below commercial values, to aid development of new estates whilst creating great profit for both the local authorities and developers and to make matters far worse, the property owners received huge bills for the development of things like roads, street lighting, sewage etc on the land that was taken. Some property owners have been forced into financial problems or even had to sell their property to pay for this ‘land grab’ demand, there are reports of figures as high as €90,000 plus being demanded. The Valencia land grab law applies throughout Valencia but it’s effect is felt mainly on the highly developed coastal strip where there is a shortage of land and values are at a premium. Other areas of Spain have different versions of the LRAU but the Valencian version of the law only applies to the provinces of Alicante, Valencia and Castellon. Valencia is an extremely large province, encompassing the area from its border with Tarragona in the north and stretching all the way down to Murcia in the south, encompassing the entire popular Costa Blanca.
The Spanish Government is basically broke and is desperate to increase its sources of revenue in anyway it can and one easy target that the tax authorities can come after are home owners in Spain. The Government or more accurately the regional provinces can raise extra revenue by raising the annual property tax that is levied on residential properties and this will particularly impact those expatriates living on their basic pensions who have retired to Spain.
The cost of living in Spain has risen considerably in the past few years. Food prices have risen steeply and so have utility bills like gas, electricity and water.
As a non-resident you can stay in Spain for 90 days but if you wish to stay longer then you need to apply for a special permit. Alot of non-residents live in Spain beyond the 90 days without registering or acquiring a permit and in doing so are living in Spain illegally. The Spanish Government has recently been getting very strict about people staying in Spain beyond 90 days and people applying to stay in Spain for longer than 90 days will now need to provide proof of income to show that they have sufficient means to live in Spain otherwise people won’t be allowed to stay in Spain beyond the 90 days. The reason for this draconian move is because the Government fears that due to the recession some expatriots may not be able to support themselves and will become a burden on the welfare state.
If you are a resident the Spanish Government wants you tell them all the bank accounts that you have, particularly accounts held overseas, because the Government thinks that many people are keeping money abroad in order to avoid paying tax and the Spanish Government is keen to get as much revenue as possible because it is basically broke. The Government will impose severe fines for every overseas bank account that it finds that you failed to declare to them.
Soaring yields on Spanish debt means that Spain is facing crippling interest rate payments on its debt.
There will be further cuts in Government spending over the next few years in order to reduce its debt, with cuts to unemployment benefit and civil service pay and pensions. The austerity programs will result in a further contraction of the economy and more public sector job losses.
According to Unicef child poverty in Spain is the highest in the EU.
There is endemic corruption at all levels in Spain. The Government is ridden with corruption and is ineffective and inefficient and this is particularly so with the local officials working in the provinces who are on the fiddle and taking back handers and where nepotism is rife. The judicial system in Spain is also considered corrupt and inefficient and ineffective as well.
The black market in Spain is huge where people earn a living without declaring it to the tax man. This is particularly the case where people are paid cash in hand, like bar work, cleaners, plumbers, electricians, hair dressers etc. In many cases the black market thrives in order to bypass Government red tape and bureaucracy and some jobs are so poorly paid that it only makes it worthwhile working if the people doing the poorly paid work can avoid paying tax. This tax avoidance will severely impact the amount of income the Government receives and will damage the Governments ability to manage the economy and maintain public services.
The Spanish economy is structurally and fundamentally flawed in that apart from its over reliance on the construction sector and tourism the country is blighted by very high unemployment running at 24% and youth unemployment rate at over 50%. The average european unemployment rate is around 10%. These unemployment figures are only set to get worse as the economy unravels. Spain’s economic crisis is not just affecting the young, Spanish pensioners are struggling to cope and are worried they will lose their savings as banks struggle to stay afloat. Many of them are using their pensions to support their unemployed children. Many elderly people were tricked into buying risky investments that have fallen in value and now that the banks are in trouble they can’t get their money back and in some cases have lost their life savings.
It is very difficult to earn a decent living in Spain. Jobs are scarce and in many cases there are no jobs at all. What jobs there are tend to be poorly paid and involves working part time. All the good high paying jobs have disappeared.
The Spanish economy is contracting and this is only likely to get worse when Spain crashes out of the Euro which will lead to high inflation followed by high interest rates to control inflation. The contracting economy and high interest rates will lead to more bankruptcies and higher unemployment.
Even if Spain stays within the Euro eventually the record low interest rates will no longer be sustainable and interest rates will rise and this will cause significant problems for people on variable rate mortgages, resulting in many people being unable to keep up their mortgage payments and forcing them to sell their homes.
Confidence in the Spanish banks have gotten so bad that Spanish citizens are pulling their money out of Spain en masse: €65 billion left the Spanish banking system in March 2012 alone.
The Spanish banking system is saturated with toxic mortgage debt. Total Spanish banking loans are equal to 170% of Spanish GDP, troubled loans at Spanish Banks just hit an 18-year high, Spanish Banks are drawing a record €316.3 billion from the ECB. Over half of all Spanish mortgages are owned by Spanish cajas. Until recently, the caja banking system was virtually unregulated. Yes, you read that correctly, until about 2010-2011 there were next no regulations for these banks (which account for 50% of all Spanish deposits). They didn’t have to reveal their loan to value ratios, the quality of collateral they took for making loans… or anything for that matter. The cajas primary lending market during Spain’s housing boom were subprime and sub-sub prime borrowers. So, with Spain today, we have a totally unregulated banking system sitting atop half of all Spanish mortgages after the mother of all housing booms that made the one that happened in the US look like a small bump.
Spanish Banks are reluctant to lend money for property purchases because they are burdened by so much real estate debt and have so many repossessed properties. Banks are now only willing to offer mortages to people if they provide a deposit of at least 20% of the mortage loan and many home buyers will struggle to find such a large deposit and this will have the effect of discouraging people from buying a home which will further reduce the demand for property, resulting in lower house prices.
The Spanish stock market has been in a free fall for over a month as Spain’s banking system teeters on the brink of collapse and is setting the stage for a horrific stock market crash.
The Spanish economy and banking system are too large to be bailed out. The IMF and ECB know this. Moreover, worldwide banking exposure to Spain is well over €1 trillion.
The British are the biggest group of people from outside Spain who buy property in Spain. There is an estimated one million British expatriates who live in Spain. However the demand for Spanish property from the British is drying up as the recession bites in Britain. Britain is on course for economic catastrophe in the year 2015 when all the consequences of the money printing, quantative easing of the Bank of England, together with the long economic and housing boom results in a massive surge in inflation and rising interest rates causing a devastating depression and crash in UK house prices. This economic and property meltdown will kill off any demand from the British to buy property in Spain.
The United States has been in recession since 2008 following the credit crunch and sub-prime mortgage crisis and the collapse of the US housing bubble. However, what the US is experiencing is not a mere recession, the US is in actual fact in a depression which is a very long and savage recession that will almost certainly last a decade or so. This will adversely affect the economies of Europe and will lead to a dramatic reduction in demand for Spanish property from the Northern Europeans.
The German economy is slowing down and is in recession as a result of slowing demand for its goods from China and south-east asia. A recession in Germany will result in fewer Germans buying property in their traditional hunting ground of Majorca and places on the costas.
China has for the past few years been experiencing astonishingly high economic growth rates of 10% annually which is clearly unsustainable and a sure sign of over-heating and this has resulted in a huge economic bubble and a massive bubble in its housing market. The Chinese economy is already slowing down and may even be in recession but the economic and housing bubble in China will almost certainly burst resulting in a severe recession in China. This will result in less demand from China for goods produced in Europe and America and this will have a serious impact on these countries.
Rapid economic decline and negative sentiment towards property will lead to further falls in house prices. Spain is facing Greek-style economic devastation, Spain is dying, Spain is heading for a lost decade, Spain is fast becoming a third world country.
Sell your property in Spain now before it ends up valued in worthless Pesetas
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