During the boom Spanish property prices were fuelled by a virulent mix of cheap credit and speculation, which inflated a bubble. The credit crunch triggered by the US subprime mortgage meltdown put an end to that, and the bubble has now burst (it was going to burst one day anyway).
But the hangover from the credit binge is a mammoth housing glut, especially of second homes on the coast, and frightening levels of mortgage debt, which means lots of negative equity as house prices fall.
Given the extraordinary nature of the financial crisis and subsequent deleveraging process, this may turn out to be anything but an ordinary housing bust. It could get a whole lot worse.
At the very least, property values now have to return to (or under-shoot) their long-term affordability level of 4 times average disposable household income, down from the recent peak of 7 times income.
Prices for holiday homes may fall even further. After all, who really needs them?
Yet many vendors are still in denial, and continue to ask silly prices, even though they don’t sell. That means that average asking prices are a poor guide to property values. There is a gulf between what many vendors are asking, and what properties are actually selling for. But, thanks to British vendors in distress and the weak pound, there is now a reasonable choice of properties coming onto the market at sensible prices. With their have-to-sell discounts, distressed British vendors are driving the market in coastal and inland areas where foreigners tend to buy.
As a result, some genuine bargains can now be found, though potential buyers will need to do their homework to find them. You can rest assured that unscrupulous types are now busy trying to sell overpriced ‘bargains’.
Despite a recent fall in Euribor, mortgage default rates are expected to surge in 2009. This will create a big headache for mortgage lenders, and it remains to be seen how they will deal with it. It could lead to a surge of discounted properties on the market.
If so, we might soon see some mouth-watering opportunities for buyers, and, at the very least, it should be possible to find good value in Spanish property over the next year or two.
But be warned, some badly developed areas have no future at any price, and there are still plenty of pitfalls to buying property in Spain. Also, there is more to many of the “opportunities” than meets the eye. As always, stick to good locations and the best new developments.