Ten reasons Spanish property prices will stay depressed

Although all I can see is continuing property pain in Spain, I keep reading suggestions that now is the time to snap up a bargain.  In fact at every stage of the crash there has been no shortage of property insiders talking up the market:

“We have again an increased demand, we do not have an oversupply . . those buying today will be judged to have been the smartest buyers”.  [Viva Estates April 2007]

“It is an exciting time in Spain, it's a buyer's market and quite frankly, it's never been better.” [Mediter Real Estate February 2008]

“it is currently a good time to buy in Spain” [Beatriz Corredor, Spanish Housing Minister June 2008]

“now is a very favourable time to purchase in Spain” [spanishpropertyclub.org.uk September 2008]

“Experts say this is a good time to buy in Spain because property prices have dropped on average by 20 per cent” [Sunday Mail  January 2009]

“Now is the time to buy in Spain . . . I predict that the overall market in Spain and in its coastal provinces will recover in due course to even greater values, undreamed-of at the height of the previous boom.” [Almanzora, developer May 2009]

So after years of false and dangerous optimism is now the time to buy? Here are my 10 reasons to doubt it.

1.  The backlog of unsold or unfinished homes in Spain

UK house prices are seeing a tentative recovery but the UK’s strict planning laws have kept the supply of new property tight whereas in Spain the opposite is true.   There are estimated to be 900,000 unsold completed dwellings weighing down the market with many more unfinished constructions.  The problem is growing: during the first of the year twice as many new builds were completed as were sold.

2.  Repossessions

As in the UK repossessed properties are adding to market woes and this drag on prices is set to worsen. The Spanish paper Expansion reported recently that “one in five households are at a high risk of default” and that banks are “preparing a for a second wave of defaults from the Autumn” because of unemployment.   Repossessed properties are often sold cheaply at auction or using websites owned by the banks like Caixa Catalunya’s www.procam-inmobiliaria.com.

3.  Unemployment

High unemployment is likely to weigh on both the Spanish and UK housing markets for a while.  It’s hard to see the market for Spanish property rising to “undreamed of” levels with unemployment approaching 20%.   Spain’s unemployed are paying the price for an economy overly geared towards construction and many jobs lost in construction and estate agency will never return.   It’s hard to see unemployment falling sharply with tourism suffering and a social security system that actively discourages  job creation.

4.  The “Credit crunch” is not over

As in the UK mortgages remain hard to come by as banks rebuild their balance sheets and remain wary of lending to all but those with perfect credit.  It’s hard to see a sustained recovery without the return of the “normal” buyers who don’t have 30% deposits to put down. Would-be buyers often fall foul of highly conservative valuations by the banks. Under the headline “Tricks and Mortar” The Economist described how the Bank of Spain has allowed the banks to hide €22bn of bad loans suggesting that they are not about to return to full health any time soon.

5.  Tarnished reputations

Even with normal credit conditions there are other reasons to doubt that Spain can shrug off the property crash at least in coastal areas popular with foreign buyers.  The perception that owning a property in Spain is a sun-drenched dream has been buried by:

>Estate agents’ hype prior to the crash (see above).  Who will ever believe that Spanish property is a rock-solid investment again?

>Illegal build scandals in Andalucia and Murcia may be resolved without all the affected homes being bulldozed but the damage to reputation has been done.

>Valencia’s “Land Grab” laws which have tainted all Costas by association.

>Bankrupt promotors have left a trail of broken promises to those that bought offplan, not to mention many half-built and badly maintained developments

6.  The weak pound

As I write sterling is at €1.17, much better than its nadir of than €1.03 in January, but a far cry from the €1.40 to €1.50 range that used to make Spanish property seem so attractive.  Can the pound recover further? I don’t know but I wouldn’t bet on it while UK government borrowing is spiralling out of control.

7.  Prices have fallen everywhere

Many of the industry’s boosters say that because Spanish prices have fallen they must now be bargains.  This is not necessarily true because prices in most countries that attract British buyers have also fallen.  For example in Dubai the investment bank EFG-Hermes said recently that they expect a drop of 50-60% from the 2008 peak.  As for Florida prices have been falling steadily for 3 years; Irish broker Jack French has 2 bed condos in Orlando from 50,000€, a 75% discount.  Prices in former hotspots in Eastern Europe such as Bulgaria are described as being in meltdown.

8.  Murky figures

It might help us see light at the end of the tunnel if we could rely on reported statistics but the old cliché “lies, damned lies . ..” rings all too true in the world of Spanish property.  The main government (INE) and private (TINSA) indices show prices falling 7-10% from the peak but property writer Mark Stucklin says “in reality, the index has to be taken with a pinch of salt”.  A further problem is promotors and other sellers failing to reduce their advertised prices putting the onus on buyers to negotiate “discounts” which does little for market transparency or confidence.

9.  Buyers returning?

Some agents have reported increasing numbers of enquiries latterly but these claims should be treated with caution for a number of reasons:

>they are made by Estate Agents!  Is it really true, as Dreamhomes Worldwide claim on their website that “there is definitely no shortage of clients in search of properties on the Costa del Sol”?

>the crash has forced many agents out of business so the surviving agents should be getting more enquiries, other things being equal

>how many “buyers” are actually just looking?  Completed transactions are the real test and these are still showing double digit year on year falls in most areas.

10. The end of a super boom

The industry is able to get away with its propaganda about “bargains” and “undreamed of” price rises in the future because the property boom mentality is deeply ingrained in the British and Spanish collective psyches.  We have become used to a cyclical pattern with higher and higher peaks following periodic busts with seeming inevitability.  There is every reason to believe that this time will be different and that we have reached the end of a super boom in property and asset values generally.

To understand why you have to look at the reason previous busts have rebounded to begin new booms.  The pattern has always been the same – governments have slashed interest rates to boost consumer demand, reflate asset prices and end the recession.  The trouble is that this policy has left households more and more indebted to the point where they can’t afford to take on any more debt even with very low interest rates.  I believe we have reached the limit of debt-fueled growth in Spain, Britain and most of the Western economies.  Any recovery we see this year will be artificial or phoney, built on the back of public sector debt which is not a sustainable source of growth nor likely to trigger a new private sector boom.

CONCLUSION

If you are being tempted by all the talk of recovery and bargains I would advise caution.  There is no rush.  Take time to observe the market making sure that you are reading unbiased opinion and facts not manipulative propaganda from industry insiders posing as experts.  A good place to look is spanishpropertyinsight.com which I have found to be a rare source of independent information on the Spanish property market.  My site focuses more on Spanish law and Spain property laws than property prices as such.