Is Spain bottoming? And are banks the best source for cheap property? Spanish Housing dynamics

So what is the reality of the situation in Spain? Have house prices fallen sufficiently and are now on the rebound as Jose Luis Zapatero, Spain’s Prime Minister would have us believe? And are the housing stats that we see, a fair reflection of what is happening?

So price falls: up to 50% since the 2007 peak, or official statistics of -7%?

Latest figures from the Ministry for Housing show National average prices have fallen 8% over 12 months, from €1,780 m2 to €1,634.7 m2 today (Sep ’09 vs ’08).

The Ministry for Housing see this as a reason for buyers to actively benefit from lower prices and interest rates.

This seems a modest property price decrease given latest quarterly house price data from Knight Frank, which shows the USA officially declined -15.4% and the UK -11.7%, Bulgaria -21.9%.

Many expected to see double digit falls and the International Monetary Fund (IMF) forecasts bigger falls than is being reported.

Agents on the ground believe prices in some instances have declined up to 50%. That isn’t to say that is the case with all property, it may be in pockets and where properties have been priced unrealistically to begin with.

So why is there this discrepancy in figures? Well official figures are not always that comprehensive and because of the way the Spanish conveyancing system has worked in the past, not all transactions may have been captured at the most accurate price.

So what is the truth about the price dynamics? It lies somewhere in between officialdom and anecdote, as ever. Coastal properties have suffered more, based on anecdotal evidence, as this is where a lot of housing stock is, whereas inland properties appear to have suffered less as a generalisation.

So what about housing stock levels?

Madrid-based real estate consultants Acuña & Asociados, report that around 1.6 million apartments and houses are on the market, (over 300,000 under construction and a further 1.1 million with planning permission that must legally be built within two years). This swamps annual demand of 218,000 units and at current levels of demand it could take until 2016 for the property market to recover.

Estimates on the profile of these properties, that is how many are holiday homes as opposed to resident worker homes, vary but as much 50% of the total of unsold stock, could account for holiday home market.

Other estimates as to the surplus stock of new properties are from Developers who say between 650,000 and 700,000, whilst other experts and analysts say between 900,000 and 1 million.

Spain has the highest ratio of properties to households in Europe, and one of the highest in the world. With a housing stock of 26.2 million compared to 18 million households, there are almost 1.5 properties to every household in Spain, according to figures from the Bank of Spain. There is not a shortage of housing, although, as discussions at the latest Property Investor Show at the Excel centre demonstrated, in all likelihood there is a shortage of the right kind of property, in the right place.

So what’s the best source of cheap deals?

Banks?

Spanish lenders acquired at least €20 billion ($29 billion) of property in the past 18 months, according to data compiled by analysts at Zurich-based Credit Suisse Group AG.

Some buyers assume that the surest way to secure a cheap Spanish property is to access repossessed properties direct from the bank. However, there are downsides to this approach:

Repossession in Spain is slow - sometimes more than 12 months. So properties promoted today as 'repossessed', may have been around and available for 18 months or so, when the owners started defaulting on the mortgage. So it may have been the case that the “bargain” property had already failed to find a buyer for at least a year, maybe longer.

The second drawback is intrinsically related to this point. Due to the length of time it takes to repossess a property, banks will want to pass this cost of effort on. So prices could be inflated to take account of the repossession process. Some estimate repossession can add approximately 6% to the debt of an average property - a cost that is recovered from the buyer. Banks may also charge higher transaction fees than you might normally expect to pay e.g. legal fees.

Moreover, in the past when banks were relaxed about lending over 100% of the market value of a property, many of today's 'cheap' Spanish properties may have been artificially over-valued. Just because a property is for sale at debt value, or direct from the bank does not automatically make the property a bargain or good value.

From developers, sellers and agents?

Many bargain properties are still available direct from sellers, developers and agents. It does not cost more to buy through an agent, than direct with a developer, as pricing will already be based on selling through multiple channels. Agents are a valuable source of advice and guidance through some of these nuances. Many developers and sellers are aware of the market dynamics and have already adjusted prices accordingly.

Just because you hear the word repossessions does not automatically mean there are cheaper properties available

So what effect will the economy have?

Although most other European Union countries climbed out of recession in the 3rd quarter, Spain’s economy shrank, for the 6th quarter in a row. Yet a 0.3% drop in GDP was barely as big as Britain’s.

Due to a heavy reliance on the property market, Spain’s current 19% unemployment rate is high. It reflects how the property market has changed since the heady days of 2007. Some 900,000 of the new unemployed are largely unskilled construction workers.

However the rest of the EU buys 2/3s of Spanish exports. The economy may be buoyed by the recovery in France and Germany for a while. But the building industry will put a damper on recovery. However Premier Jose Luis Zapatero, still says Spain's recession will be milder than elsewhere in Europe.

So what is the outlook for Spain?

Buying into Spain now, while prices are keen, is surely attractive for many who may have found Spanish prices unaffordable in the past. This assumes finance is available to those wishing to do so. Whilst the economic outlook is still uncertain, it remains a favourite among buyers because of its climate, lifestyle and beauty. It is a great time to be getting into the market if a medium to long term outlook is taken.

And whilst property price declines have been more accentuated on the coast, inland prices have held up. So if you are feeling uncertain about the prospects and not sure whether more price falls are likely, an option would be to look inland more, where prices and values have held up more and are likely to be less volatile in the future.

Sources: Bloomberg, OPP, Economist, RR de Acuna, IMF, Investors Chronicle, Credit Suisse, SPI, Knight Frank

Louise Reynolds
Property Venture^®

^{Posted 1st December '09} 

Property Venture^® is an independent, UK-based agent. We help time-strapped investors and holiday home purchasers, buy abroad by guiding through the buying process, so reducing the hassle. We visit the countries you buy in, so we can offer common-sense, grounded advice. Overseas members of NAEA. This means we have been subjected to the membership criteria and have signed up to follow the professional Code of Conduct established to help you, the potential buyer or investor, buy property with confidence