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Foreign press pessimistic over Spain’s economic prospects and property market

Foreign Dailies such as The FT, The Guardian, and Le Figaro (France) have all recently published articles raising doubts about the sustainability of Spain’s economic growth, and the economic dangers of Spain’s property bubble bursting.

In general the articles argue that, impressive as Spain’s economic growth has been over the last decade or so (Spain now generates 12% of the Euro-zone’s GDP, and was responsible for 32% of the Euro-zone’s GDP growth between 2000 and 2005 – says The Guardian), it has been driven largely by a real estate boom that has covered up serious structural problems in the economy, for instance labour market rigidities, rapidly rising labour costs and low productivity gains.

Le Figaro quotes Ricardo Verges of Spain’s association of architects (see below) as saying that “the Spanish real estate market is growing at a frenetic rate, its absolute madness,” and that “This growth is not sustainable. Spanish household mortgage debt has now risen to 600 billion Euros, which means we have hardly paid for anything we have build, just the interest.” Le Figaro also notes a recent study of 19 EU countries by the organisation Euroconstruct finding that 28.4% of all new construction in the EU has taken place in Spain.

Rapidly increasing property prices (150% up since 1998 despite the stock of properties doubling in the same period – according to The FT) can partly be blamed on Spain’s membership of the Euro-zone, where low interest rates intended to resuscitate Germany’s economy have not suited Spain’s overheating economy. Low interest rates mean cheap money and easy credit, which in Spain’s case has fanned the flames of a real estate boom. As a member of the Euro-zone Spain has been unable to raise interest rates to cool the boom in a timely fashion, and can no longer devalue its currency – formerly one of Spain’s favourite ways of increasing its competitiveness.

Some of the articles conclude that Spain’s real estate bubble will burst sooner or later, with painful economic consequences. Spain’s real estate sector presently generates 18% of Spain’s GDP and 12% of it’s employment, the equivalent of 2.5 million jobs.

Clampdown on Illegal building and corruption in Malaga rolls on

Operation Malaya – the police and judicial operation against illegal building and corruption centred on Marbella in the Andalusian province of Malaga – has entered a second phase with the arrest on 27 June of 30 more individuals, including local politicians, officials, and property developers. Most of the arrests have been made on suspicion of bribery and money laundering. Property developers arrested to date include Fidel San Roman of the developer Cantizal, Emilio Rodriguez of Construcciones Salamanca, and Francisco Garcia of Aifos.

Meanwhile the Spanish authorities continue to stop illegal building projects in the province of Malaga. The largest intervention to date, authorised in June by magistrates in Coin, has stopped work on some 2,000 new properties on various developments in the municipality of Tolox, located inland from Marbella.

Record number of Spanish housing starts despite softer market

Despite a softer market, cooling prices, and lengthening sales times, Spain is still building more properties than the UK, France and Germany combined.

The latest figures released by Spain’s association of architects (el Consejo Superior de los Colegios de Arquitectos de España) show 211,556 housing starts in Spain in the first quarter of the 2006, up by 1% on the same period last year. However, over a 12-month period to the end of March 2006, housing starts were up by 4.1% compared to the same period last year, reaching 820,107 - the largest number of housing starts ever to take place in Spain during a 12-month period. The previous 12-month record was achieved in 2005, with a total of 812,294 housing starts from January to December.

Commenting on these figures, Ricardo Vergés – the association’s chief economist – described this level of housings starts as “unsustainable”, and pointed out the risks to the Spanish economy.

By region, Andalusia continues to build the greatest number of new homes, with 45,300 housing starts in the first quarter of the year (down 6% on 2005), followed by Catalonia (31,975, up 1.8%), and the Valencian Region (26,554, down 4.1%).

Extremadura experienced the greatest increases in housing starts in the first quarter of the year, up by 33.5% to 4,599 starts, followed by La Rioja, up by 27.9 to 2,238, and Galicia, up by 22.6% to 13,890.

Excluding Ceuta and Mellia, the greatest percentage falls in housing starts by region were in Navarra, down by 36% to 2,081, Asturias, down 30.5% to 3,631, and Cantabria, down 12.9% to 2,968.

Meanwhile, a new report from Euroconstruct reveals that Spain accounted for 28.4% of all new European housing starts in 2005, whilst only having 9.7% of the EU’s population. The report forecasts that the growth in residential construction activity in Spain will gradually decline, reaching average European levels some time after 2008. One of the reasons for this is the withdrawal of European structural funds, which will now go to the 10 new EU member states.

Property sales in Barcelona and Madrid fall by 50%

A new report from Spanish real estate consultants Forcadell reveals that property sales in Barcelona and Madrid have fallen by 50% this year compared to 2005. The report finds that an excess of supply over demand in Spain’s largest cities has lead to a slight fall in the prices of resale properties, and that vendors are starting to accept offers 15% to 20% below asking prices.

According to Gonzalo Bernandos of Forcadell 650,000 new properties will be built this year in Spain, whilst plans to build 820,000 properties will be signed off by architects. This means that in 2007 there will be 350,000 properties left unsold, adding further pressure to the Spanish real estate market. Bernandos concludes that “the slow down of property prices is now a reality, and will probably get worse in coming years.”

More Spanish properties, but less accessible than ever

A new report from an organisation that monitors sustainability in Spain (Observatorio para la Sostenibilidad de España – OSE), reveals that 30,000 square metres are built every day in Spain, and voices concern about the record 812,294 housing starts in Spain last year - more than France, Germany and the UK combined. According to Luis Jiménez – the director of OSE –half of the new properties being built do not match real demand for housing, and are built with speculative criteria in mind. Jiménez also raises a concern that, whilst there are more and more new properties on sale in Spain, high prices mean they are increasingly inaccessible to first time buyers like young adults.

Euribor - the rate used to calculate interest payments for most mortgages in Spain - started June on 3.37% and finished the month on 3.51%. The average for the month, which is the rate used to calculate mortgage repayments, was 3.4% (to be confirmed by the Bank of Spain), up from 3.308% in May. As a consequence, borrowers with variable-rate mortgages in Spain will face higher mortgage payments.

SPANISH PROPERTY NEWS BULLETIN (MAY 2006 REVIEW)

Are foreigners buying more or less property in Spain compared to previous years? The answer has implications for anyone thinking of buying or selling Spanish property.

There are figures from the Bank of Spain showing that foreign investment in Spanish property fell to 266 million Euros in February, down from 466 million Euros a year earlier – a 43% drop. Serious stuff! But when you look at January and February the drop isn’t quite so severe – just down 23% compared to last year. But that is still a big drop.

However, the bank’s figures aren’t a perfect measure of foreign buyer activity. So what other sources of information are there to use along side the bank’s figures?

I periodically survey estate agents and developers selling to foreigners, many of who notice trends immediately in their sales figures. There are some regional variations, but on the whole they report that the market is clearly down on previous years, but not such that the bottom has dropped out. Furthermore, attractive areas with a limited supply of property are as hot as ever, showing once again how location always trump all other considerations in the end.

Then there is also Google Trends (www.google.com/trends), which allows you to see the popularity of different search terms over the last 2 years. This tool reveals that the number of people now searching Google (in English) for Spanish property is significantly down this year compared to 2004, perhaps by as much as 50%. Compared to last year, however, the present level of interest is only down by about 10% or so, and the trend appears to be stabilising. So it looks like the speculators have disappeared and left the market to buyers looking for homes and holiday homes, and there is still a good number of them around. The problem is that in some areas there is also too much property around.

The funny thing is, according to Google at least, UK interest in Spanish property appears to be concentrated in West Lothian. Maybe life there is even more dreary than in other parts of the UK, making West Lothian residents more desperate than most to escape to the blue skies and sunshine of Spain.

For more information on the present state of the Spanish property market don’t miss the latest market review below.