Is it too soon to revisit the Spanish property market?

by Ray Clancy on November 19, 2008

The Cost del Pain in SpainThose who look at the UK property market and wonder exactly what is going on and when it will all come to an end will no doubt be reviewing the Spanish property market which has a lot of similar concerns to the UK. The number of houses for sale in Spain is growing, buyers are waiting on the sidelines and even those interested in buying properties are unable to raise the necessary finance. The situation is nearly identical to the UK and while many Spanish property experts have called the bottom of the market over last few weeks there is a growing concern that this is only the tip of the iceberg.

Over the last few weeks we’ve seen a number of Spanish property developers go bankrupt, companies collapse and investors left out of pocket. While some investors will be able to participate in a Spanish property compensation scheme, it is more the damage to the confidence in the sector which is of concern at the moment. As we have seen in other areas of the world, a lack of confidence often equates to a lack of activity and further falls in property prices seem almost inevitable.

Property prices

In the year to October it has been revealed that the average property in Spain fell in value by 6.5% which in itself is alarming but not necessarily on the verge of a nightmare scenario. However, the fact that some property experts are predicting a further 9% fall in 2009 dos not bode well for the future of the Spanish property market.

As we touched on above, the financial markets of Spain have literally collapsed and mortgage finance is very much at a premium if even available at all. If the most pessimistic of property experts are to be believed property prices would need to fall another 20% in order to bring down the affordability factor to a level which would see first-time buyers enter the market. As this is “never” going to happen in the short term many first-time buyers seem to have moved onto the rental market for the time being.

The Spanish rental market

As we mentioned above, the complete lack of affordable property, finance and the likelihood this will not change in the short term has led many first-time buyers to move on to the rental market. Historically only around 8% of Spanish family’s rent property although the longer the current property downturn continues the more likelihood that this is going to increase markedly.

However, for those expecting rental yields to increase in line with the rising popularity they may well be disappointed as there are also signs of unsold properties being moved into the rental market as well. This will increase competition in the sector and likely lead to a softening of rental yields at best and a substantial downward movement and worst. The relationship between the rental and homeownership market has been fairly unconnected historically although with literally no properties selling in some parts of the country there is a need for owners to maximise their income at a time when money is very tight.

The Spanish economy

When you consider that Germany has already officially confirmed that its economy is in recession, France is sure to follow, the signs for the rest of Europe are not good. Spain, like so many countries around the world, has been struggling with an increasing inflation rate at a time when demand and money in consumer’s pockets has come under great pressure. Rescue bailouts, upbeat statements from the government and a number of cuts in interest rates from the European Central bank have all been tried over the last few weeks but as yet there has been no meaningful improvement in the situation.

The problem at the moment is the fact that nobody in control today has ever seen or even heard of such a situation where inflation is running out of control in the short term, economies collapsing and the financial system around the world in disarray. The billions of pounds which have been thrown at the system have yet to make any real headway and until we see a loosening of the financial purse strings by Spanish banks there is little likelihood of any increased activity or increase in prices in the Spanish property market.

To make matters worse, many local Spanish economies depend on tourists to make ends meet and with UK holidaymakers set to slow down in their spending this could place yet more pressure on an already creaking system.

Bankruptcies, fire sales and half finished developments

As the old property saying goes “when there is blood on the streets it’s time to buy”, now could well be the time for those with an appetite for risk to assess which properties and which areas offer good value on a long-term basis. Cash buyers have total control of the market and can literally dictate their price with more and more Spanish residents becoming ever more desperate to raise funds. Downbeat statements, downbeat surveys and downbeat assessments of the Spanish property market have led to more and more panic sales which are pushing prices ever lower.

If potential buyers are able to negotiate substantial discounts on current property prices they could be able to place a buffer between the price they paid and the eventual bottom of the market, which should offer a useful opportunity to make money when the bounce finally comes. However, it would take a brave person to invest a substantial amount of money in the current environment although as they say, “fortune can favour the brave”.

Summary

Spain is a very difficult property market to predict and in some instances very difficult to understand although the similarities with the UK market are striking even if the UK seems to be further ahead in its own property market “crash”. Finance is unavailable to the masses, sellers are coming over the woodwork, overseas investors are not interested and the Spanish economy is set to enter recession any time now.

Those who are brave and able to negotiate extremely attractive prices could see themselves well positioned for the eventual improvement in the property market but it will be down to location, location, location. The Spanish property market has not been this bad for many years and forecasting with confidence went out of the window some time ago.

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