Well, it looks like the Spanish property market has been forgotten after the looters took away the treasure during the property boom and the economy fell in depression. It’s the right impression and we do not blame you if this is your viewpoint.
But the reality is that the market is alive, the rental sector is a strong option and investors have a tough task to find good properties in a market with plenty of underperforming properties.
To approach the current Spanish property market it is necessary to understand 3 key points and to put them together:
1) The nature of its huge property stock
2) Given the high unemployment rate (20% – more than 4 million unemployed) and the deep credit shortage there is a relevant lack of purchasing power and also many repossessions.
3) The unwanted role of Banks as estate agents.
The housing stock and disturbing prices
The property stock is probably the heavier burden in this crisis. The real figure of empty properties waiting for a buyer is somewhere between 800,000 and 1 million units.
The property market has the burden of thousands of properties in poor locations which are so low quality that, during the property boom, they were the object of speculation. Now they are becoming bad assets and there is a move towards demolishing these “toxic assets” so as not to distress the market, as has happened in Ireland.
The paradoxical fact is that, despite such a large property stock in Spain, prices are still overvalued between 8% and 47.6% as a national average, depending on the statistical source: the European Commission recently stated that the rate was 17%, the European Central Bank that it is at 8% and, last week, The Economist said that it is 47.6%.
It makes sense to say that a further drop will happen in 2011. So far the average prices have dropped by 12% since 2007.
In good locations, the price drop has not been important since the demand for prime assets is higher than the offer, according to the Director General of the consultancy CB Richard Ellis in Spain. In the coast and second residence market, it is a fact that the reduction were by 25% and even 35%, depending on the location.
Concern about Repossessions
During the credit expansion and property boom, selling a house could take just a few weeks. With the credit shortage and unemployment, there are properties that have been in the market since 2007 and, during the wait, owners have lost them by being repossessed.
Mortgage underpayments were 0.8% in 2007 and currently they are at 5.5% according to the Bank of Spain. If you do not pay, the Bank takes over your property- and that is what is happening in Spain. During the 2010/1Q repossessions reached a new peak since 2007: 27, 561.
Banks are key to ease the market
Banks have now repossessed property assets worth 20.5 billion euros to put into the market.
In October 2010, the Bank of Spain (Banco de España) put pressure on Banks to sell their assets. But the key point is that Banks prefer to keep the prices high, and they are not dropping the prices as much as the market demands. For how long can they hold this situation?
In 2011, investors may encounter lower selling prices, especially from Banks, according to the evolving market.
Spain is still a good market with plenty of possibilities for holiday -home investors, city residents and countryside investments.
The key point is to find “prime” investments (good locations, quality housing etc) if you want to buy in Spain. “Prime” property can still be found for a reasonable price. But it could be worthy to wait a few more months. The best way to do it is to conduct local research and make price comparisons in order to negotiate the asking price with the seller.
Regarding Banks, they are putting units in the market but so far they are not unveiling their cards in full. We have seen websites of Banks where the properties for sale were quite disappointing. Banks are holding on the market.
In the short term, investors may find that buy-to-let is the best option for taking advantage of the current market situation and could start repaying the mortgage after the first month from the rental yield.
It is important to negotiate the price in this current economic climate, but also to negotiate the mortgage with the Bank. The Euribor is rising and a good fixed interest for the first years could be positive.
Given the general drop in prices for holiday homes, holiday-makers may find excellent discounts on the coast for second residences.
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