from Mark Stucklin

Introduction to the Spanish Property Market Report 2007/2008
Spain’s decade long property boom officially ended in 2007. The Spanish press now talks about it in the past tense, and even the government’s notoriously unreliable figures show that Spanish property prices are no longer rising, in real terms at least. The only surprise is how long it lasted, given that the Spanish property market already looked like a bubble back in 2005.

I wish there was something good to say about Spain’s property boom now it is over, but nothing comes to mind. I can’t help feeling that a lot of the construction and rising prices had more to do with greed than housing. As a consequence, Spain now has a monumental housing glut, an economy hooked on cement, and a coastline that looks like a council estate in many places.

That is not all. In the wake of the boom, Spanish property prices are 197% higher than a decade ago (that is, almost triple), and the average Spanish home now costs 7 times average earnings, according to a recent report from the Royal Bank of Scotland. A lack of affordable housing creates social problems and resentments, and housing is now one of the top 3 voter concerns in Spain. A record number of holiday homes and empty investment properties exacerbates the problem.

Rising property prices may have pushed up household wealth on paper (property makes up around 90% of Spain’s household wealth), but thanks to the boom, Spanish households have also loaded up with interest-bearing debt at double the rate of rising property values. Rising house prices mean paper profits, but interest-bearing debt means cash payments every month – a big difference.

“Total (Spanish) mortgage debt has grown roughly twice as fast as house prices, with total mortgage balances nearly six times the level of 10 years ago,” explains the RBS report. “When combined with unsecured borrowings, aggregate Spanish household debt now amounts to €750bn - equivalent to 120% of total disposable income. This compares to c. 160% for UK households.”

So one of the legacies of the boom is that Spanish households, and to a degree foreign owners of Spanish property, are swimming in debt. Not a healthy situation at the best of times, let alone during a credit crunch.

The credit crunch may have played its part in bringing the Spanish property boom to an end, but it was an orgy of cheap credit, more than anything, that stoked up the boom in the first place.

Abnormally low interest rates, longer mortgage terms, and higher loan to value ratios triggered an upward spiral of borrowing and property prices, the one feeding off the other. Now the banks have turned off the mortgage tap there is a real risk of vicious downward spiral.

The boom also fed corruption, which explains why Spain has slipped down the rankings published by Transparency International (from 20 to 25). Many unscrupulous people, including corrupt mayors, planning officials, and redneck developers, made a great deal of money in the boom. Standards plummeted, and cowboys did as well or better than serious professionals. In this respect, it couldn’t have ended soon enough, though the end didn’t come in time to save the reputation of Spain’s property sector.

We also have to consider the possibility of a post-boom construction-lead recession in Spain, despite forecasts from serious organisations like the ECB, OECD, and the IMF all saying that Spain’s economy will grow by more than 2% in 2008 and 2009.

I have written this report on the assumption that there will NOT be recession in 2008, as one has to assume that the institutions mentioned above know better than me. But given Spain’s massive current account deficit, high levels of household debt, low productivity, high inflation, falling competitiveness, and over-reliance on the construction sector for economic growth, I personally think that a construction-lead recession is likely (let’s say a 51% probability). If there is a recession, then most segments of the Spanish housing market are doomed to stagnant or falling prices for years to come. Look at what happened to Germany, Japan and Portugal. Even so, some segments would do much better than others, which is a theme I try to explore in this report.

So, after that cheery introduction, let’s look at what actually happened to the Spanish property market in 2007, and what to expect in 2008. We start with an overall look at the market - prices, demand and supply in 2007 - and then use the Costa del Sol as a case study to illustrate the market in more detail. After that we will look briefly at a selection of other popular coastal areas, before finishing with some conclusions. Note that this report focuses on the property markets in popular coastal areas, and largely ignores the wider domestic market in Spain’s interior.

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They have nothing to worry about as some here would have us believe - As the Chinese will come and buy everything. Sorry for them really.

Hello Mr. Goldberg,

As resumes go it just doesn't get much better than yours above. Matter of fact as well as just factual, with a total absence of hype (all too common here sometimes unfortunately).
Many thanks. Do keep up the good work!

Neustria

Hi Neustria, I wish I could take credit but it is not my words but Mr Stucklins, he has written a long article on spanish market.

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