After all the headlines and shock knee jerk articles across the media we found Mark Stucklin's level headed and balanced analysis of the current state of the Spanish property market to be very compelling reading. Check out Mark's excellent website with a wealth of information on the current market as well as his regular columns in the Sunday Times.
Overview of the Spanish real estate market
Some alarming things have been written about the Spanish property market in recent articles like ‘Survive the Costa property crash’ (Sunday Times, April 29), ‘Costas house price crash’ (Times, April 27), ‘Euro helps topple Spanish property’ (Telegraph 25 April), and ‘Spanish property boom ends’ (Financial Times, April 24). Based on the headlines would think that the Spanish property market was in an advanced state of collapse. This is not actually the case.
The event that inspired all these gloomy articles was a share price correction of property companies quoted on the Madrid stock exchange, as jittery investors dumped construction stocks in April. At the time of writing shares of property companies are some 25% below their February highs. One company – Astroc – is down over 80%, though that still leaves it 120% up over 12 months – a great annual investment return by any measure.
The fall in property share prices was overdue and somewhat expected after speculation had pushed up prices too far. Much of the press reporting glossed over the stock market context, giving the misleading impression that it was the Spanish property market in trouble. Of course trouble in the stock market is not good news for the property market, as it reveals increasing pessimism about Spain’s housing market. But falling stock market confidence and property share prices it is not the same as a housing market crash.
In fact, the reality of Spain’s property market’s performance in the last quarter is not as bad as you might think from recent articles, but not as good as the official housing price figures from the Government imply. Spain’s decade long real estate boom is over, and it is a buyer’s market, but it is also a complex situation of regional markets performing in different ways.
Latest figures on the Spanish property market
Average national Spanish property prices rose by 7.2% to 2,024 euros/m2 over 12 months to the end of March 2007, according to figures from the Spanish housing ministry.
The story these figures tell is one of Spanish property inflation slowing down from 18.5% in 2003, 17.2% in 2004, 12.8% in 2005, and 9.1% by the end of 2006. This is the lowest rate of property price inflation since 1998, when Spain’s property boom started. Based on the Spanish government’s figures, it looks like the Spanish property market is on course for a soft landing, in which property prices rise in line with general inflation. At the same time, all areas are still experiencing annual property price growth, and the national average is double the general inflation rate, providing a reasonable return on investment.
By autonomous region property prices rose the most in Ceuta and Melilla (13.8%), followed by Galicia (12.3%), and the least in Madrid (4.5%) and La Rioja (2.6%). Price increases in all of Spain’s Mediterranean provinces were below 10% for the first time in 10 years.
The problem is that the government’s figures have to be taken with a pinch of salt. They can be unreliable, and sometimes show property prices as increasing when they are falling. It is difficult to gather reliable housing price statistics in a country like Spain where under-the-table cash payments are still widespread. When cash payments start to fall, as it appears they might be, property prices recorded on deeds go up, even if transaction prices are falling.
Whilst the government’s figures show reasonable, if cooling, price increases, figures from Spain’s land register show a clear slowdown in transactions during 2006.
The total number of property transactions recorded in Spain’s property register – the Spanish equivalent of the UK’s land register – fell from 989.341 in 2005 to 916.103 in 2006, an annual drop of 7.4% in unit terms.
Resale property transactions fell by 4.97% to 526,509 units (57% of the total), whilst completed transactions on newly-built properties fell by 10.11% to 389,594 units (43% of the total). Transactions fell in Andalusia by 7.3% to 178,189, in Catalonia by 8.8% to 152,802, and by 8% in the Valencian Region to 136,720. These figures show a market contracting against a background of an increasing supply of new properties. The notaries association has announced reported that property transactions in March of this year were 30% down on the year before.
On the question of property asking prices, which say something about the confidence of vendors, figures from Kyero.com show big variations in changes of regional asking prices over 12 months to the end of April. For instance asking prices appear to have increased by 10.7% in Malaga province, to an average of €304,355, but fallen by 12.5% in Mallorca, to an average of €515,000. This would imply that vendors are in the ascendancy in Malaga, but losing power in Mallorca. What is certainly true is that buyers and vendors have to adapt to the conditions of local markets, and negotiate accordingly.
Spanish property market feedback
The government’s figures may not be the most accurate, but they do at least capture the slowdown in the Spanish property market. Information from other sources tells the same story. Real estate consultants Knight Frank report that sales times on the Spanish coast have doubled to between 24 and 30 months over the last 3 years. A study by property consultants Aguirre Newman finds that property prices on the Costa del Sol have fallen by 4.7% over 12 months, though part of this fall can be explained by a trend towards smaller properties. And a report from consultants Grupo I estimates that demand for newly built holiday homes on the Spanish coast will fall by 18.3% to 90,000 properties this year, with the market shedding 26,000 transactions – a drop of 22.4%- of newly built property in 3 years.
To understand what is really going on you have to break it down by region.
COSTA DEL SOL
Buyer activity on the Western Costa del Sol peaked in 2003 and has been falling ever since. Corruption scandals, money laundering busts, and illegal building problems in Marbella damaged buyer confidence in the whole region, and a deteriorating price-value calculation encouraged potential buyers to look elsewhere. “Property prices are back to where they were 2 to 3 years ago,” explains Mark Clifton of the Internationa Property Partners in Marbella.
But after several difficult years there are now some grounds for optimism. Malaga airport is being expanded, and a new rail link under construction along the coast should significantly improve access, and boost visitor numbers. Corruption is being tackled, demand is diversified, and vendors many now realise they have to accept offers. Attractive properties in the right areas and the best developments appear to selling quickly if the price is realistic, and inland there is an acute shortage of the kind of fincas that affluent British buyers want. “Buyers today are savvy people with money, who are well informed and know what they want, not the deranged investors with 100% mortgages who inflated the bubble a few years ago,” explains Barbara Wood, of The Property Finders.
This could be the best time in years to get quality property for a reasonable price on the Costa del Sol. But there is also a glut of rubbish identikit apartments in undesirable locations all along the coast, from Tarifa to Murcia and beyond. Steer well clear of these types of properties, wherever they are in Spain, as prices may well fall.
Example property price changes over last 2 years:
+ 2-bed, 2-bath duplex penthouse in the Elviria area of Marbella would have cost you around 317,000 euros 2 years ago, now would cost 325,000 euros, so little change.
+ 400m2 townhouse with communal pool in the exclusive Sierra Blanca urbanisation of Marbella was around 641,000 euros 2 years ago, now around 679,000 euros, though you could pay as much as 849,000 euros for same thing if you don’t research the market.
MURCIA
Murcia is an ambitious latecomer to the property game. There has been an explosion in the region’s property supply, with 10 times as many properties now being built than 10 years ago, much of it on golf course developments intended for foreign buyers.
In recent years relatively high prices on the coasts to the north and south drove property buyers, especially investors, into the arms of Murcia’s developers, with their easy-to-sell off-plan investments. But Murcia’s prices increased too far too fast, and resale prices on many projects have been coming down in search of demand for the last couple of years.
“Some developers don’t seem to build what British buyers want,” comments Gordon of Blue Med Properties. “When prices rise, buyers expect more in return, so there is now a glut of properties on new developments that don’t match buyer requirements at the price. That’s going to stop prices rising anytime soon.”
There are fewer British buyers around than in past years, though the ones that there are seem well informed, looking for value, and serious about buying if they can find it. Overall, the number of transactions is down, and given the amount of new property coming onto the market, expect prices to remain in the doldrums for some years. The few outstanding developments in the region, such as Hacienda del Alamo, which tick all the right boxes for British buyers, should benefit from buyers who like the region, and don’t mind paying for quality.
Example property price changes over last 2 years:
+ Typical 2-bed flat on coast, fully furnished, in complex with communal garden, pool, private parking now costs was around 150,000 a couple of years ago, now 135,000 Euros
+ Typical villa on a golf course (not front line) 3-bed, 3-bath, 200m2 plot (no pool), was 380,000, now 350,000 Euros
