Spanish property market in freefall

Probably not want we all want to hear!

Taken from BusinessWeek.com

Spain's once-booming property market is in freefall, official statistics have revealed for the first time.

The announcement that house sales had plunged has dashed government hopes for a "soft landing" in the sector that has driven the Spanish economy for more than a decade.

The buying and selling of homes fell by 27 per cent in January compared with the same period last year, Spain's National Statistical Institute (INE) announced yesterday. The collapse coincided with a 25 per cent fall in the granting of mortgages, the biggest drop since 2004. The size of individual mortgages has also fallen, by nearly 4 per cent, as providers fear for the security of their loans.

The indicators published by the state organisation for the first time confirm the widespread fear that Spain's property sector is not just cooling off, but falling sharply. "We have to accept this is not a gentle correction, but a full-blown crisis. We can only hope it will be sharp and short," says Fernando Encinar, a director of Spain's leading online estate agent, idealista.com.

The news will scare millions of Spaniards -- and hundreds of thousands of Britons and other northern Europeans -- who stretched themselves to get mortgages on homes they believed were a cast-iron investment.

Miguel Blesa, president of the Caja Madrid savings bank, Spain's second leading mortgage provider, warned that things would get worse. "There will be more problems in the property sector in coming months, since the market in new homes is paralysed," Mr Blesa predicted.

"Many people thought that buying property, especially a second or third home, was an investment to make a profit. Now we'll see cascades of these homes up for sale." Mr Blesa was speaking in Vienna, where his savings bank yesterday inaugurated a new headquarters to handle credit lines for big construction companies operating in central and eastern Europe.

The message seemed clear: leading financiers are forsaking domestic homeowners and shunning Spain's burst bubble to boost property development in livelier markets abroad.

The bulk of the transactions -- 52.4 per cent -- logged by INE were in second-hand homes, where the decline in activity was sharpest -- 35.6 per cent. The drop in sales of the remaining 47.6 per cent of new homes was 14.6 per cent. This milder fall reflected developers' savage price-slashing of up to 30 per cent to shift new properties.

"The problem is that many people refused to face up to the slowdown for more than a year, fearing to produce what they most fear. But now it's clear the sector is in crisis, there's a danger people will make things worse by panicking and predicting disaster. It's a herd mentality," Mr Encinar says.

By region, Murcia -- the Mediterranean "Costa Calida", which has become a magnet for British homeowners in Spain -- remains reasonably active. But prosperous Catalonia saw a dizzying 42.7 per cent drop in property transactions, and Madrid has virtually ground to a halt.

There is still demand, Mr Encinar insists. "But buyers, not sellers, are fixing the price, forcing owners to negotiate. This has never happened in Spain before. It means we can expect substantial discounts in coming months. It could soon be a good time to buy."

Spain's National Construction Confederation, which represents big companies, has pleaded for improved tax breaks for first-time buyers, to halt the downturn. Several high-profile construction companies have gone bust in recent months: with sales paralysed, they could not repay their massive bank loans.

Provided by The Independent—from London, for Independent minds worldwide

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"There is still demand, Mr Encinar insists. "But buyers, not sellers, are fixing the price, forcing owners to negotiate. This has never happened in Spain before. It means we can expect substantial discounts in coming months. It could soon be a good time to buy."

Hmmm I don't think so, not unless you can get 50% plus off. History shows that the average property cycle is around a decade or more so it probably will be up to 5yrs before we see the very bottom. I still maintain that a lot of the 2 bed apartments built in recent years will be unsellable at any price. There are just too many and lack the faetures of location and views etc that make property attractive.

For property in Spain to return to historic norms in terms of house price to wage ratios of 3.5, either wages have to rocket or prices will fall by 70% on average in that 5 years. My bet is on the latter. Spain will be lucky not to have high double digit unemployment before its all over. Zapatero is a clown who has promised much and delivered an economy based on debt which this year is going to unwind as quickly as it went up. With a trade deficit approaching 10% of GDP Spain is fiscally in a worse shape than the US and with nearly 18% of GDP coming from the construction industry its not hard to see where this one is going.

To make matters worse I fear once it becomes really aparent what a mess they have made and Europe get tired of bailing Spain out of its incompetance and greed, Zapatero will look to "wealthy" foreign property owners to pick up the bill, through an array of unpleasant property taxes. "wealthy" by the way means you and me, except it aint going to be me cos I'm renting.

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Like taxing property further is going to help stimulate the market. Quote: "Spain's National Construction Confederation, which represents big companies, has pleaded for improved tax breaks for first-time buyers, to halt the downturn." Why not for all buyers? I've long held that 7% transfer tax (or IVA on new builds) is a bit steep, to say the least, and a large part of the reason for the "black money" culture that prevailed until very recently. I know other countries have similar or even higher taxes so I know Spain isn't unique in that respect. But I wonder why the govt. doesn't give buyers a break now. If nothing is selling, their 7% share of nothing is always going to be nothing, but 3.5% of something, for example, would be more than nothing - if you follow my drift. Mrs.T introduced something similar for 6 months back in the late 80's or early 90's I think, dropping stamp duty to try to jump start the market. Don't know if it helped or not?

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Roberto

Agreed, thats what sensible countries would do, but given we are in this mess, it would seem to indicate that this country is far from sensible.

Watch for increasing action to try and prop up the market, like subsidies for first time buyers, tax releif etc. Sadly this governemnt action always makes things worse. From the article it says "lets hope this is sharp and swift. This is the key - by trying to prop the market up the governmnet slows the slide in prices artifically and just prolongs the misery and conpounds the problem. This is how to turn an ordinary recession into a depression. they will try and do the same thing with jobs, proping up wages and trying to employ more people in the government sector. All this does is get in the way of a recovery by creating false jobs, boosting taxes and debt and creating inflation.

Governmentts need to leave well alone and let the free market sort this out. Let jobs in the real estate sector go and property prices slide to real levels. This is the cleansing process that is required to get people back to productive work and property prices back to realistic levels so that the country can again start to recover and grow on a sounder footing.

Sadly history shows that governments can't wait to meddle and make things worse, Spain will copy the US and follow it into depression.

Re taxes what you missed was the word "foreigners" - he will look to target foreigners as voteing Spanish would never accept these taxes, whilst voteing Spanish will be keen to see greedy foreigners taxed as many perceive the problem lies at their door anyway. Its called the politics of greed and envy and always fails because the source of the wealth just ups and leaves eventually and quashes any new foreign wealth. But it won't stop then trying it.

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"Governmentts need to leave well alone and let the free market sort this out". Is this why Barak & Hilary etc. have had very little to say about the economy? Or is it because they're too busy thinking about other countries thousands of miles away that America has messed up, to think about domestic problems?

Will the EU not prevent Spain from taxing foreigners differently from Spaniards? CGT has already been adjusted due to Brussel's intervention.

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"Governmentts need to leave well alone and let the free market sort this out". Is this why Barak & Hilary etc. have had very little to say about the economy? Or is it because they're too busy thinking about other countries thousands of miles away that America has messed up, to think about domestic problems?

 

No both candidates have used the economy as a stick to beat Bush and the republicans. However i have not seen as you say a realistic solution from them, as I suspect there isn't one that does not involve a huge recession and lots of pain. This it appears is not an option for voters.

The analogy I have heard used is that America's problems are like an alcoholics. The cure is a hangover (recession) the problem is drink (debt).  More drink (debt) puts of the day of reckoning (hangover) but usually the pain is by then is much worse.

Hilary has said that she is going to get people back to work by spending on "renewable energy" and "infrastructure". What she didn't say was who was going to pay for it. Countries in the past have paid people to dig ditches and then fill them in again. The problem is that whilst this produces jobs it does not create wealth.

The answer to the US's problems is to get back to saving and investing and production, something that made the US very wealthy in the first place.

However saving and investing was deemed dull and production was deemed a bit grubby. They seemed very happy to let other parts of the world do all that.

The problem for the US is that the transition from spending beyound their means to a more realistic lifestyle is going to mean a lot of change and a lot of heartache for many who belived they could live forever on increasing amounts of debt. This pain will be felt in depreciation of the dollar, inflation, loss of jobs, falling house prices and a shrinking of the economy.

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"......heartache for many who believed they could live forever on increasing amounts of debt. This pain will be felt in depreciation of the dollar, inflation, loss of jobs, falling house prices and a shrinking of the economy."

And for those who have stayed out of debt? They suffer the same consequences I suppose? Doesn't seem very fair to me

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My own opinion is Spain is going to go through a Germany or Japan. That is a lost decade or more as the system purges the excess out. It may even be longer as the bubble was much bigger here than else where. I agree with TJ it will take about 5 years for the bottom to really hi. Like in Germany prices will decline and then go sideways. Housing prices have been flat in Germany for more than a decade. Part of that is that Germans are renters and not owners (some 70% rent). The last time prices declined in Spain and unfortunately I can't find the link, they went down 30%. I fear this time it will be much worse.

On the positive side Spains economy is more diverse than it was the last time the bubble burst and the Government is running a surplus.

My advice to those thinking of buying is to rent for a few years and see where house prices go   how far prices decline. You won't lose any money by renting but you will lose alot if you buy a place only to see it's value fall. More importantly from a negation point of view, if I house has been sitting on the market for several years with no offers people will be very open to cutting the price. I told my wife when looking at places around Madrid (in the north prices for a Villa run about 350,000) cut the price in half and I expect that to be realistic.

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Rob, obviously have to agree that property could go down and consequently a property bought today could lose value. I do not see however that renting is a better option as you will never get your rent back, it is dead money. Frankly it looks like a lose-lose situation .

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No my point was that if your looking at buying your better off waiting a bit and seeing where the market goes. If house prices drop a lot as expected a years worth of rent vs perhaps tens of thousands of dollars lost/saved will make renting look like a bargain. My wife and I are renting currently for two main reasons. One it's very close to work and moving (as we want to move the Sierras north of Madrid) would mean a second vehicle and associated costs, and secondly we want to see where the market goes. If it goes down as much as I expect, paying 15.000 in rent will look like a bargain compared to saving 100.000 grand off the price of a house.

So it's not rent or buy but rent and shop around for a really good deal.

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Couldnt agree more Rob - renting should not be considered dead money in the current climate with values (prices) not increasing and far better to wait until a really good deal comes around - better to wait rather than jump in and all of a sudden the purchased property  could only be sold for 100,000€ less than it was. factor in mortgage payments as well (assuming one has one) and money spent on rent might equate to the money spent on the mortgage payment as well.

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We should really put the death the myth that renting is ALWAYS  throwing your money away and owning always beats renting. There are a million and one reason for renting over buying. Two relevant to Spain. One you pack the family and finally decide it's time to escape England. Renting is a great way to test the waters for a year or two to see if you and kids can make the adjustment. We actually met a couple who did just that, picked up and moved to Madrid, she had family here, after a year they realized it wasn't working out, problem with getting help for the kids learning disabilities. Had they bought they may have been stuck with a house that won't sell or worse has to be sold at a big loss. Renting is particulay importnat for people who move to France, never underestimate the difficulty of learning a foreign language.

Secondly where rents and mortgage are way out of whack. Like Madrid and many parts of the US. Can you really justify a mortgage payment of 2400 euros a month vs rent of perhaps 800 (true story) here in Madrid Also In America often renting allows you to live in a good neighbourhood for a 1/4 the cost of owning.

Renting is not just throwing your money away, anymore than owing a house is the only way to wealth.

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I tried to squash the "renting is dead money" a while back in the credit crunch thread. When you buy a property you pay interest to the bank on the loan. Since the bank owns the property, you are effectively renting from the bank. Only the repayment portion is therfore not dead money and this is the same as saving anyway. When you can rent for half the cost of interest only mortgage (read renting from the bank) renting is a no brainer, and when prices are falling its a double triple no brainer. As pointed out when you first move to a new country it really really just is common sense.

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But surely all these arguments about renting vs buying apply to those who want either a temporary home (holidays etc) or to make a quick peseta or two out of the deal.

On the other side of the coin, there are different buyers.  Those who want to buy to have somewhere to live on a permanent basis.  There are still a lot of us who don't really care about prices up and down all the time.  We want a nice house to either retire to or to live in.  I look back at the late eighties when people in UK were buying purely because they wanted to make a profit.  I bought mine in UK early 80s at 29 grand or so.  Lived in it ever since so the silly money it is now worth doesn't concern me in the least.  Interest rates in UK then were 14% (although you did get MIRAS) and my mortgage payments were just under half my net income.  As interest rates came down, I paid the same amount of mortgage which cut down the balance.  Within 10 years, my payments were only a quarter of my net income and I paid it off 10 years early (15 instead of 25).  Ups and downs of prices held no interest to me as it was my home, not my investment.  If I'd rented, that would have gone up with inflation and I'd have no home.

I have now bought a place in Spain to retire to, it will be my home and I don't really care if it goes down in price in the next 5 years or so because I bought it outright and have no intention of flogging it on to make a profit.  To my mind, getting the place you want outweighs all other arguments.  I am now old enough to be able to say I've been through it all before, a few times to be precise.  I remember the US$ at 3.79 to the pound and also 1.30 to the pound.  Now it is 2 to the pound which, to my mind, is not great but others think it is fabulous.  The Peseta, at one time, was worth the equivalent of almost 1 euro to the pound back in the mid 80s so even 1.26 is better although 1.60 was much better.

Germany, which has been mentioned, has never had a great buying marker, as UK didn't until the 80s.  Mortgages in Germany were taken out for 99 years and passed on through the family but virtually everything was rented.  Most people in UK rented in the 60s and 70s and home ownership was quite rare amongst the mass population.

So don't despair.  Unless you're in for the cash or happen to be an estate agent, that is.

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Glad I amnot alone Bobaol. We will hopefully be looking for a permanent home later this year,without mortgage.We will rent for a short time while looking but long term rent is not on the agenda.

As you all say, it depends on personal circumstances and if you are looking for investment or just a home.

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Glad I amnot alone Bobaol. We will hopefully be looking for a permanent home later this year,without mortgage.We will rent for a short time while looking but long term rent is not on the agenda.

As you all say, it depends on personal circumstances and if you are looking for investment or just a home.

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Two months ago I noted the price of some properties we liked.Just checked the same sites again and prices have not moved.

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Read a report (idealista.com, I think) recently that said prices in Madrid fell by.........0.1% last month. I can tell TJ and Rob in Madrid know far more about these things than me, but who to believe? If you're gonna wait for 50% reductions in prices, by this account, you're gonna wait till hell freezes over. And that's a lot of rent!

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Two months ago I noted the price of some properties we liked.Just checked the same sites again and prices have not moved.

We are back again to the issue of asking prices versus selling prices. Asking prices where I am in the Costa Tropical have not moved much either, or tho I noticed in Sur in English over the w/e that there are more and more distressed ads advertising up to 50% off already.

Someone stated on here that it was taking years to sell property, well in my mind if it is taking years to sell a property then the price is wrong. If I had an apartment worth lets say for arguement 250k I can advertise it forever at 400K. But and this is the crux, if I want or have to sell then I am going to have to find a motivated buyer and we are going to have to agree on a realistic price.

Where we are in the C.T, selling prices, which after all is the only measure worth quoting, are a min of -25% from the asking price. That is if you can find a buyer.

Many people now will be struggeling with mortgage finance they can't afford with or without rental income. For these people waiting long will not be a great option.

As Rob says selling prices are way out of whack with wages and this is just simple economics.

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In response to Bobaol I think everyone has their own perspective and you have a very realistic and pragmatic view in relation to your own short and long term needs and you have a very defined focus on how your move to Spain is going to pan out as it is where you wish to retire. In general I would agree that there are arguments in favour of buying (particularly bearing in mind what I do for a living and I am an owner) but the argument at the moment in current situation dictates that things are very much more in favour of renting and less likely to be dead money - particularly for someone moving to Spain to see if its going to work for them. I firmly believe that the market will be back in Spain but with the current surplus of property to buy market forces dictate that prices will fall - while I know you are content and more than comfortable with your plans for many people  (and I think the majority of buyers in Spain)  their purchase is a mix of holiday home, rental and investment - that doesnt make them right or wrong it is simply fact - in that case I am sure you would understand that if Mr & Mrs Smith had bought a property at 200,000€ only to find the one next door sold for 150,000 within six months would understandably be dismayed - hence the argument that renting can be preferable to buying and shouldnt necessarily be considered dead money.

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