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Is now the time to buy property in Spain?

Cliff D'Arcy
by Lovemoney Staff Cliff D'Arcy on 07 February 2013  |  Comments 7 comments

The Spanish housing market has collapsed, but there are tentative signs of recovery. However, things could well get worse before they get better.

Is now the time to buy property in Spain?

For the past three years, Spain's property market has been going relentlessly backwards, with prices falling for 36 months in a row. But it's now showing the first signs of recovery after five years of pain. So is it a good time to find your very own place in the sun?

The Costa crash

Northern Europeans have been keenly hunting homes across the Spanish mainland and islands since the 1960s. Rich Brits, Germans and Scandinavians bought bargain villas and apartments in order to take advantage of the famed sun, sand and sangria.

However, when the global financial crisis hit in 2008, Spain's highly inflated property bubble burst. In the worst-hit regions, property prices have more than halved, with prices falling 50% or more. On average, home values have fallen by more than a third (36%) since peaking in April 2007.

However, a small glimmer of hope appeared this week. In January, prices were largely unchanged, according to the latest survey conducted by Spanish property website Fotocasa.es and IESE Business School.

As reported on Bloomberg business news, the average price of a Spanish residence last month was €1,890 (£1,631) a square metre. In December, this figure was just €1 more, so this might just mark the beginning of the end of the Spanish property slump. Even so, the yearly decline in prices was nearly a tenth (9.9%) – far worse than anything we've seen here in the UK since 2009.

Cheap places in the sun...

One problem for prospective British buyers is that Spain currently has a two-tier property market. There are the prices you see advertised by estate agents and property developers, and then there are the true prices from sales, which often take place at discounts of up to a quarter (25%) off 'official' prices.

In other words, this is the sort of buyers' market where bargain hunters thrive, snapping up premium properties at bargain-basement prices. This is especially the case in such a stagnant market, where a near-total lack of selling activity means that prices are purely guidelines.

For example, some Spanish banks have been off-loading repossessed (seized) properties at discounts of 60% to 70% from original purchase prices. With such deep markdowns on offer, there should be no need to rush into buying, especially if prices continue to weaken this year.

...but there could be more pain to come

While the arguments for investing in post-crash Spanish property are growing, only fools would rush in to this bombed-out sector without doing their homework first.

Indeed, one leading economic consultancy in Spain, RR. de Acuña & Asociados, warned last December that the Spanish property slump could continue for another 10 to 15 years. The firm expects prices in major cities to fall a further 30% by 2018, while popular coastal regions could see prices halving from their current levels.

This would be a disaster for the estimated 400,000 Brits who already live in or own homes in Spain, some of whom might see their homes fall in value by three-quarters (75%) from peak to trough.

In a strongly worded report, RR. de Acuña & Asociados warned that "The [Spanish property] market is broken," because there are close to two million properties awaiting sale. This unsold stock breaks down as follows:

Used homes on the market

800,000

Completed development units

700,000

Foreclosures

300,000

In foreclosure proceedings

150,000

Under construction

250,000

Total

2.2 million

Of course, classical economic theory tells us that when supply greatly exceeds demand, prices can go only one way: downwards. With a massive glut of 2.2 million unsold homes and only 200,000 to 250,000 properties changing hands each year, Spain has a property overhang that could take a decade to clear.

In this scenario, there is simply no way that the Spanish market can gain any upwards momentum. What's far more likely is that prices will resume their downward slide, before levelling off when Spain's economy finally starts to show sustained strength

The true picture: Spain in numbers

To show you how dangerous it could be to bet on Spanish property right now, I've pulled together some stats on the state of Spain (and the UK) today. As you can see from my table below, there are plenty of problems for property investors to worry about.

Country

Spain

UK

Population

48 million

62 million

Yearly property sales

200,000

900,000

Unemployment rate

26.6%

7.8%

Youth unemployment rate

56.5%

20.2%

Economic growth (2012)

-1.8%

0%

Predicted growth (2013)

-1.3%

0.7%

As you can see, the UK economy was flat in 2012 and is expected to grow slightly this year. Alas, Spain is still firmly in recession, with its economy expected to keep shrinking until 2014. Also, with unemployment running at more than three times the UK's rate of 7.8% and youth unemployment at record high, there seems to be no light at the end of the tunnel for Spain just yet.

What's more, with Spain's 'zombie' banks and property developers locked in a 'death spiral' of fire sales, write-downs, bad debts and defaults, there is no reason to expect any lasting property recovery in the immediate future.

In summary, while property prices in Spain are well below their former highs, they could yet have further to fall. So this is a market only for the brave, foolhardy or risk-hungry!

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Comments (7)

  • jerms
    Love rating 0
    jerms said

    having owned a property since 1995 i have seen the market fluctuate but never as much as now. the best buys are from repossed as the banks ''only'' need to recover their outstanding mortgage.

    Does any one know how a value is calculated in this current market on the first death of joint ownership & the application of IHT within a Spanish will?

    would the author like to research this?

    Report on 08 February 2013  |  Love thisLove  0 loves
  • Tigger01
    Love rating 3
    Tigger01 said

    I bought a property in Spain, along with around 1800 other people back in 2004 and the whole development was never completed, virtually no one has got their money back even though many people had Bank Guarentees, many did not even though that is Spanish law. I learnt a valuable lesson, never trust Spanish builders, Spanish Banks and Spanish solicitors they are all after you money!!!! Lots of people have taken the builder to court and won cases but the builder has parted with nothing, he has now been found guilty of fraud but still has not been ordered to pay back the money, conservative estimates are that he and his accomplices made well in exces of 15,000,000 Euros!!! You have been warned..

    Report on 08 February 2013  |  Love thisLove  0 loves
  • yocoxy
    Love rating 152
    yocoxy said

    "Should you buy property?" by Cliff D'Arcy.. Not too many of us needed to read the article to guess the conclusion..

    I am little better at predicting property prices than any of the so called experts, although If you predict falls every year for eight years you'll be right some of the time, so congratulations for that Cliff. If you predict every day that it'll rain today you'll be right 106 days per year on average but it doesn't make you a weather expert. Much better to predict no rain and rising house prices if you want a better success rate.

    A couple of years ago when Cliff was predicting the next big crash I was more optimistic, believing stagnation for a few years would be the more likely outcome. So far in the UK we haven't seen that second crash and although lost in the deluge of negative statistics, prices in the UK are currently up 32% on 10 years ago.

    In Spain I don't know which way prices will go during the next fifteen years but I have a suspicion that they'll be higher than they are now over that period.

    A couple of counter arguments to the one-sided picture above:

    The Spanish property market (at least in the holiday areas) is very different to the UK market, sellers don't tend to put a property up for sale and expect to find a buyer within weeks. It is quite normal for properties to be advertised at inflated rates and then sit on the market for a couple of years. Therefore the disparity between the number of properties for sale and number sold each year is not some insightful indicator of impending doom, it's normal.

    Properties are being sold at 25% below asking prices? Does this mean that the market is in meltdown? No, it's another symptom of the way the market works as described in the paragraph above. No-one should pay the asking price.

    How many Spaniards buy in the tourist areas or on the islands? Very few. So how does Spanish unemployment affect this? It largely doesn't. Prices in these areas will be affected more by the economic recovery in Germany, UK, Holland, Russia and the other nationalities of the most prolific buyers.

    So, maybe prices aren't going to rise dramatically but the facts as I see them don't support the one sided, doom laden view in this article.

    Report on 08 February 2013  |  Love thisLove  0 loves
  • PDB11
    Love rating 75
    PDB11 said

    Yet another article - and by Cliff, who should know better - that assumes rising house prices are good, and falling prices bad.

    Why is this? Because people gear their investment too highly.

    No-one borrows £200k to invest in a quarter-million's worth of shares. But loads of people borrow that much to invest in a quarter-million's worth of house. (For a suitably flexible definition of "worth", that is.)

    If you plan your spending on property according to the use you'll get out of it, the variation in prices will matter much less. The trouble is, it's too late. House prices are over-inflated, and have been since the 1980s boom, or even the 1970s boom. To me, "good" news is that house prices return to sensible multiples of income, not that they rise at silly rates.

    And yes, before you ask, I do own two houses. But I haven't put silly gearing on the investment. My mortgage is now roughly what I borrowed to buy my first house in 1990, just after that market collapse.

    On the other hand, I have absolutely no wish to live in Spain, so perhaps I am not the best person to comment. Germany, on the other hand... Low levels of ownership and a very sluggish market make it attractive financially, too. No house price volatility! I'm just not convinced by their build quality.

    Report on 08 February 2013  |  Love thisLove  0 loves
  • nickpike
    Love rating 308
    nickpike said

    Just goes to show that the EU continues to collapse, and the same will probably happen here. It certainly would if we allowed free market forces to operate and allowed capitalism to run genuinely instead of the government removing all the risk. I still predict a crash here. We have a zombie government trying to run a zombie economy. Their 'extend and pretend' and 'delay and pray' tactics are going to run out of puff soon.

    Report on 10 February 2013  |  Love thisLove  0 loves
  • yocoxy
    Love rating 152
    yocoxy said

    Keep predicting Nick. What is that four years now that you've been wrong?

    Meanwhile I've paid off my mortgage, I live rent and debt free and the value of my house is not too relevant any more.. No more mortgage rises and no rising rent until the day I die..

    If only I'd spent my time and emotional energy predicting a crash instead of getting on with life and putting solid financial decisions in place to benefit my family in the long term.. Ahh well, life goes on..

    Report on 11 February 2013  |  Love thisLove  1 love
  • NatalieFT
    Love rating 0
    NatalieFT said

    The ever changing market is always important but so is the rate that you get when making your international purchase or indeed sending money back to the UK if you have a property abroad.

    Here are a couple of tips to make sure you get the best rates when moving your money overseas:

    1. Book a Forward Contract. If the exchange rate is in your favour, I would advise you to consider booking a Forward Contract. This will lock the rate in for up to 12 months ahead so you will be protected from the market moving against you – this will possibly save a lot of money when you finally need to make an exchange!

    2. Place a Profit Order. If you have a target rate of exchange you would like to try and achieve then placing a Profit Order will enable you to do this. All you have to do is tell us the rate you would like, the amount of currency you want to exchange and we will monitor the market for you 24/7. If your rate becomes available at any time we’ll automatically book your currency transfer. This means you don’t have to worry about missing the rate you want at 4am.

    3. Rate Alerts. A Rate Alert works exactly the same way as an Order except we don’t book your currency exchange, we simply notify you by email or SMS if your rate becomes available.

    So if you find the perfect property for you and the move is right then just make sure you've prepared your way to pay as the banks can be a costly way to manage it. If you’d like to chat to find out which tool would best suit your needs, please get in touch . More than happy to give you advice on the current market and how to move your money abroad.

    Report on 14 February 2013  |  Love thisLove  0 loves

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