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MARK STUCKLIN

IN DEPTH

Review of the Spanish property market’s performance in the second quarter of 2006

Introduction
This is an interim report intended to give potential buyers and sellers of Spanish property a snapshot of the current state of the Spanish property market, from an independent (non-sales) point of view. To this end it reviews the Spanish government’s latest figures on the performance of the real estate market, and contrasts these with observations from Spanish property professionals and other individuals currently involved in the market.

Overview

Official figures show average Spanish property prices still rising by just over 10% per year in nominal terms (6.7% in real terms), whilst the Spanish property inflation rate slows.

Property professionals working in areas popular with foreign buyers – principally the costas – report a different picture. They report that that market is very slow or stagnant, with an excess of supply over demand in many areas, and stable or falling prices. Properties are taking time to sell, and cash buyers in a position to complete quickly can negotiate significant discounts from asking prices.

The Spanish government’s latest figures

Average Spanish property prices increased by 2.9% in the 2nd quarter of the year, and by 10.8% in nominal terms over 12 months to the end of June 2006, according to the latest figures from the Spanish Ministry of Housing. This raises the average cost of property in Spain to 1,942 Euros/m2, up from 1,753 Euros/m2 at the end of June 2005. With inflation in Spain running at 4.1%, the real increase in Spanish property prices over the latest 12-month period was 6.7%. After the latest increases, Spanish property is now 102% more expensive than it was 5 years ago.

Despite the latest double-digit price increase, the underlying trend is towards a slowdown in Spanish property price inflation. Spanish property inflation rates have fallen for 6 consecutive quarters, from 17.2% at the end of 2004, to 10.8% at the end of June 2006. If this trend towards a ‘soft landing’ for the property market continues, as the government expects it to, then real property price increases in Spain (after adjusting for inflation) will be close to zero in a year or so.

As always, there was a considerable difference in performance between autonomous regions. Having been one of Spain’s star performers between 2001 and 2004, with price increases of over 20% per year, Madrid spluttered to a feeble 7.5% - well below the average of 10.8% and only just above the consumer inflation rate. At the other end of the scale was Galicia, with property price up by 19.3% over the last 12 months, the highest 12-month gain in Galicia on record. It appears that Madrid and Galicia have switched places.

Ä summary of 12-month property price increases for selected regions is as follows:

Average property price increases over 12 months in % terms:

Andalusia 11.1%
Murcia 8.7%
Valencian Region 10%
Catalonia 13.2%
Balearics 11.3%
Canaries 8%
Galicia 19.3%
Asturias 12.3%
Cantabria 11.7%
Madrid 7.5%
Extremadura 9.1%

By province, the best performer was Lugo in Galicia, with price increases of 37.6% over 12 months, and the worst performer was Tenerife in the Canaries, with just 5.6%. Prices actually fell by 0.2% in Tenerife in the 2nd quarter of 2006.

Market feedback

Whilst the government’s figures show property prices increasing by around 10% on the popular Costas, property professionals in these areas report that prices are stagnant or even falling for most types of property. According to professionals working in the business, the price expectations of vendors are now unrealistic, and until these come down the market will stay flat. There are now signs that vendors are starting to accept substantial discounts in order to make sales, and we can expect this trend to continue in the short term. So despite the government’s figures it appears we are in a buyer’s market. Buyers can shop around, take their time, and make aggressive offers.

The buyer’s market, however, only applies to properties in second or third tier locations. For the small number of properties in the very best locations, for instance beachfront walking distance to shops and restaurants, the market is still hot. Properties in top locations appear to be still selling fast, and prices for these properties are firm. Sales of super-luxury properties costing millions of Euros in exclusive areas of the Balearics and the Costa del Sol are also going well, as Europe’s growing number of multi-millionaires still choose Spain as the place to buy their holiday homes.

Other factors

Interest rates. Base rates in the Euro-zone have now risen to 3%, a rise of almost 50% in just 8 months. Mortgage repayments on variable-rate mortgages will also have risen by 50%, and this is bound to cool demand for property in Spain by increasing the total cost of buying property.

Housing starts. Although the number of housing starts in the first quarter of the year fell by 3.6% to 155,311 compared to the first quarter of 2005, the rate at which new properties are being built in Spain is clearly unsustainable. It does not help that so many new properties are being built at a time when demand is clearly cooling. The number of new properties coming on to the market is likely to put downward pressure on prices.

Conclusions

For the bulk of the market prices are too high and there are too many properties chasing to few buyers. This situation will continue at least for the remainder of the year, if not longer. Cash buyers in a position to complete quickly are starting to find that vendors are prepared to accept figures that are substantially lower than their asking prices. Prices may yet go lower, at least in real terms (as inflation erodes the real value of stagnant prices), but it is already possible to pick up attractive properties in reasonable locations for less then they cost a year ago.

PROPERTY MARKET NEWS

Foreign investment in Spanish property continues falling

Foreigners spent 1.962 billion Euros on Spanish property in the first 5 months of the year, 13.2% less than a year ago.
http://www.spanishpropertyinsight.com/spanish_property_news_bulletin_latest.htm#1

10m want to quit ‘over-taxed’ UK

ONE in five Britons - nearly 10m adults - is considering leaving the country amid growing disillusionment over the failure of political parties to deliver tax cuts, according to a new poll.
http://www.timesonline.co.uk/newspaper/0,,176-2330678,00.html

Viva Estates drops commissions to 2%

Viva Estates - one of the largest estate agents on the Costa del Sol - has dropped the commission it charges on resale properties to 2%, partly in order to stimulate a sluggish market. Chris McCarthy - MD of Viva - has explained the reasoning behind Viva’s decision in Spanish Property Insight’s forum. Viva’s move is not without its critics.
http://www.spanishpropertyinsight.com/forums/viewtopic.php?t=1160

Euro base rates and Euribor continue to rise

The European Central Bank (ECB) raised base rates from 2.75% to 3% at the beginning of August, citing concerns over inflation. Consequently Euribor - the rate used to calculate interest payments for most mortgages in Spain - also rose in August to 3.615%, the 11th consecutive monthly increase, and the highest rate since July 2002.
http://www.spanishpropertyinsight.com/spanish_property_news_bulletin_latest.htm#2

13.4% of property sales in first quarter to foreign buyers

The latest figures from the Spanish government show that foreigners bought 31,342 Spanish properties during the first quarter of the year (January - March 2006), which amounts to 13.4% of the total number of Spanish properties sold in the period (233,670).
http://www.spanishpropertyinsight.com/spanish_property_news_bulletin_latest.htm#3

Tighter regulations on the way for estate agents in Spain

The Spanish press reports that María Antonia Trujillo - Spain’s Minister for Housing - hopes to introduce new regulations for estate agents by the end of the year. Trujillo wants to tackle the speculation and abusive practises plaguing the sector, and increases legal protections for consumers. “It’s not right that in Spain someone can earn more with one phone call than other workers can earn in a whole year”, says Trujillo.
http://www.spanishpropertyinsight.com/spanish_property_news_bulletin_latest.htm#4

200,000 new properties planned for Mar Menor area of Murcia

The Spanish daily ‘ABC’ reports that 200,000 new properties are planned for the Mar Menor area of Murcia, to add to the 60,000 presently under construction, and the 70,000 already built. If realised, these plans will take a heavy toll on the environment and more than double the population in the summer high season to over 1 million. 33 large resorts are included in the plans already approved by Murcia’s government.

COMMENT

Everyone who lives in Spain knows that there is a full-on construction boom taking place. You only have to look out the window to find evidence of it. Non-residents have to work harder to know what’s going on, but even they are now at least vaguely aware that Spain’s construction sector is excited.

Of course a booming construction sector is no bad thing when it is a healthy response to economic fundamentals, if it does not gobble up a disproportionate amount of the economy’s resources at the expense of other types of economic activity, and if it lays the foundations for sustainable long-term economic growth.

Does the Spanish construction boom look healthy? Not if you compare British and Spanish housing starts (see chart below). Though just one benchmark, to my mind it suggests that construction levels in Spain are excessive and unsustainable, especially now that demand for Spanish property is cooling. Too many properties are being built in Spain, of the wrong type, and at the wrong price. Many of them will struggle to find buyers when finished.

So what measures are needed? Developers need to focus more on what people want to buy, rather than what it suits developers to build, and housing starts need to tumble fast to bring some equilibrium back to the market. Unfortunately, Spain is now so dependent upon construction for jobs and economic growth that a contraction in the sector could cause all sorts of economic problems. What would the hundreds of thousands of new construction workers do instead? Retrain as hairdressers?

Despite the economic risks, the composition and rate of new construction in Spain needs to adapt fast to cooling and changing demand. Otherwise the imbalances will just get worse, and the inevitable readjustment will be more painful. As Jimmy Cliff sang, “The harder they come, the harder the fall.”

Mark Stucklin

HOUSING STARTS: A COMPARISON OF SPAIN AND THE UK

Spain has a population of 43.5 million people, compared to 60 million in the UK, so the UK’s population is 38% bigger. Spanish GDP per capita in 2005 (PPP) was $26,840, compared to $32,548 in the UK, so British GDP per capita is 21% higher than Spain’s. However, for the last 5 years, Spain has been building more than 3 times as many properties per year as the UK, despite having a smaller population, a smaller economy, one of the highest levels of properties per capita in the EU, and the highest ratio of empty properties in the EU. It makes one wonder why Spain is building so many new properties.
http://www.spanishpropertyinsight.com/spanish_housing_starts_vs_uk.htm

This month in the forum, wise words from Barbara and Katerina having clawed back their money with interest from a developer who failed to deliver the goods >>>
http://www.spanishpropertyinsight.com/forums/viewtopic.php?t=1053