Our independent property expert Mark Stucklin presents his monthly update on the state of the property market in Spain.

The place to buy: Prices in Castellon rose 18pc, the biggest hike on the costas

Average Spanish property prices increased by 12 percent in nominal terms over 12 months to the end of March 2006, according to the latest figures from the Spanish ministry of housing.

This raises the average cost of property in Spain to EUR 1,888 per square metre, up from EUR 1,685 per square metre at the end of March 2005. With inflation in Spain running at 3.9 percent, the real increase in Spanish property prices over the latest 12-month period was 8.1 percent.

A real estate boom has been one of the key drivers, if not the main impetus, of Spanish economic growth over the last 5 to 10 years.

This leaves the Spanish economy highly exposed to the real estate sector, and keeps the Spanish government awake at night worrying about the consequences of a sharp downturn in the property market – the ‘hard landing’ scenario.

However, according to government figures at least, it appears that the Spanish property market is cooling down gradually.

For the sake of simplicity we will focus on nominal property price increases, ignoring the story of real property price changes.

However, one should keep in mind that real annual property inflation in Spain is only running at around 8 percent today, rather than the 12 percent implied by the nominal figure.

In the first quarter of 1998, when Spain’s real estate boom started, annual property inflation was running at just under 4 percent in nominal terms.

In other words, Spanish property at the end of the first quarter of 1998 (31 March 1998) was 4 percent more expensive than it had been a year earlier.

With some minor ups and downs, Spanish property inflation continued to increase every quarter until the end of 2003, when it peaked at 18.52 percent.

Since then annual Spanish property inflation has been gradually declining, falling to 12 percent at the end of the first quarter 2006.

What does future hold?

Where will prices go now? Most of the ‘expert’ forecasts for 2006 predict that Spanish property prices will ‘only’ increase by between 5- 10 percent this year, in nominal terms (in real terms, if inflation stays at around the 4 percent level, this would represent real Spanish property price increases of between 1- 6 percent).

It is not difficult to imagine a trend that takes Spanish property inflation to around 8 percent in nominal terms by the end of 2006.

As always, the increase in average Spanish property prices belies significant differences in property inflation between Spanish regions.

Whilst the national average property price increased by 12 percent, the highest rise was 22.4 percent in the province of Ciudad Real (Castilla La Mancha), and the lowest was just 3.5 percent in Ourense (Galicia).

See www.spanishpropertyinsight.com for full figures.

It is interesting to note that, at least according to the government’s figures, most of the best-performing regions, in terms of property prices increases, are also Mediterranean coastal areas where foreigners tend to buy property in Spain.

Spanish Mediterranean costal property prices rose by between 8.6 percent in the province of Tarragona (Costa Dorada) and 18.6 percent in the province of Castellon (Costa del Azahar).

Only two coastal provinces popular with foreign buyers – Alicante (Costa Blanca) and Tarragona (Costa Dorada) - had property inflation rates below the national average in the latest period.

Are the Government’s figures too rosy?

Ciudad Real showed the steepest rise of inland destinations

Talk to most people involved in property on the Spanish Mediterranean coast and they will tell you that the market is flat or depressed (depending upon the area). So private research is likely to give you a quite different picture of the market to the government’s figures.

There are various factors that would explain the coastal property market’s weakness, which adds credibility to this scenario.

First of all, the off-plan investors who so distorted the market between 2001 and 2004, and who made up over 50 percent of the market in some areas (my estimate) have largely disappeared.

Buyers are now people looking for holiday homes or relocation properties – end users rather than speculators/investors – who are fewer in number and much more cautious about buying. You don’t see dollar signs in the eyes of these buyers.

Euribor and Spanish mortgage interest rates are rising, which increases the financing costs of buying Spanish property, which in turn squeezes purchasing power.

Mortgage lenders are getting more nervous as a result, imposing stricter lending conditions, which reduces overall access to borrowing. This acts as a brake on demand for Spanish property.

At the same time, due to the absurd number of new houses in Spain in recent years, there is a glut of properties on the market in many popular areas, with off-plan investors and developers all trying to sell to the same reduced number of home buyers.

With these factors at work in the background there is plenty of anecdotal evidence to suggest that prices for average apartments on average developments in average areas are stagnant or falling.

This observation contradicts the government’s figures showing Spanish property prices rising by between 8.6 -18.6 percent in coastal areas.

So which version is correct? The Spanish government’s figures or the observations of people involved in the market on a day-to-day basis?

Personally, I have my doubts about the government’s figures, which I suspect of exaggerating property inflation in Spain.

The Government gets its figures from authorised appraisal companies, and it’s no secret that appraisal companies have been helping their main clients – mortgage lenders – for years by producing ‘optimistic’ valuations.

This doesn’t mean to say that the government’s figures are worthless; far from it - they are still useful for identifying trends and comparing regions. However I do suspect the government's figures of exaggerating property price increases in many parts of Spain over the last few years.


Not all bad news

Even if the government’s figures aren’t entirely accurate, it doesn’t follow that all regions in Spain are suffering from depressed property markets.

The only areas that really appear to be in serious trouble are those where they have recently built an enormous amount of mediocre property in mediocre locations.

Otherwise, relatively attractive areas free of excessive new construction are subdued compared to previous years, but not exactly in crisis, and it looks like there is a flight to quality going on, with the old rule of ‘location, location, location’ proving itself once again.

For instance the Balearic property market, where new development has been more restrained, appears to be holding up, and on the Spanish mainland good quality properties – mainly resale – in very localised areas with excellent surroundings appear to be selling well.

In the cities, Barcelona, Palma, Seville and Valencia are all still enjoying strong demand, according to local real estate professionals.

The market is also performing in different ways according to property types and budgets, as one would expect.

Warning

And finally, a warning that some estate agents selling Spanish property still seem to think that we all live under a stone.

If you are thinking of buying property in Spain, be very sceptical about the claims that salespeople make about capital gains, resale potential and rental potential. The following forum discussion says it all.

Spanish estate agency claims at property exhibition

Mark Stucklin

See: www.spanishpropertyinsight.com

Mark Stucklin writes on Spanish property for The Sunday Times

[Copyright Expatica]

[May 2006]

Subject: Property: Expert Property analysis