The two main objectives of the housing ministry, created by the newly elected government of José Luis Rodriguez Zapatero in 2004, were to slow down the rise is house prices — and thus to avoid the financial and economic consequences of a property bubble — while at the same time increasing the scarce number of properties available for rent.
The strategy has proved the correct one to follow: more rented accommodation is needed for those unable to afford to buy a house in a market where prices have soared since 1995, when the present housing boom began. Slowly; haltingly, a slowdown in house prices is becoming evident, albeit amid fears that a collapse is still possible.
That said, it is also becoming evident that the government’s policies to boost the number of rented properties on the market is doomed to fail. In 2006, just 11.25 percent of Spanish families lives in rented accommodations, lower than the 11.4 percent in 2001. In the rest of Spain’s European Union neighbors, the average is 38 percent, and in Germany, it rises to more than 50 percent.
The government is playing down the failure of its policies. Housing Minister Maria Antonia Trujillo says that 420,000 new rental contracts have been signed since 2004, but the figure seems unlikely to make much of an impact in percentage terms.
Some attribute the low number of rentals to Spaniard’s traditional preference for home ownership. At the same time, property has become of means of investment for many, the result is that demand for housing is higher than it should be, given its high cost.
The plain truth is that neither tradition nor our appetite for investment explain the shortfall in rented accommodation, given that demand continues to rise.
The most plausible explanation is that on the one hand, the number of properties available for renting is still very low, a fact that can largely explained by most people’s belief that renting out a home is risky. If property owners could be given better guarantees under the law, coupled with fast-track legal action against tenants who do not pay their rent, then the number of properties available to rent would rise.
There is another factor that prevents people from renting: the comparatively high price. Most people belief that for more of less the same cost as renting they could pay a mortgage. This is a perception that might as well change in 2008, when the accumulated effect of multiple interest rate hikes begins to make itself felt.
- Source: Doomed to Failure, Editorial, El Pais, English edition published with the International Herald Tribune, July 2, 2007
Archive for the ‘Housing Market’ Category
LONDON (Dow Jones) — The foundations of Spain’s property market are looking increasingly shaky, and a sell-off in the sector just a few short weeks ago may well be a sign of more troubles ahead, analysts say.
“The grounds for the panic were real enough and it will probably happen again, ” said Charles Dumas, director of Lombard Street Research. “The Spanish housing market has had it.”
April’s 3% slide in the top stock market index, the Ibex 35, was led by a sell-off in real estate companies, construction firms and mortgage lenders.
The property sector bore the brunt of the declines. Real estate investment firms Grupo Inmocaraland Inmobiliaria Colonialboth fell more than 10% in a single day, as shares of Costa del Sol developer Astrocwere slammed by worries about valuation in a sector driven to record levels by deal speculation.
And a recovery remains elusive.
The property sector has lost about 8% since April as investors continue to fret about a glut in the supply of housing and rising European interest rates, while the Ibex 35 and construction sector have both gained about 2%. The banking sector remains flat.
Valuations high
Even after selling off in April, Spanish real estate stocks have risen by about 120% since January 2005, while the Ibex 35 index has climbed by around 60% in the same period.
Shares in developer Grupo Inmocaral, which recently merged with Inmobiliaria Colonial to form one of Spain’s biggest real estate companies with a market capitalization of more than 5.5 billion euros ($7.3 billion), rose more than 71% from a low of 2.53 euros in June last year.
Larger peer Metrovacesa, which is valued at just over 8 billion euros ($10.6 billion), has seen its shares more than triple in value since 2002 to stand at just over 80 euros last week.
Stock market valuations have risen as the Spanish economy has strengthened.
Spanish GDP grew by 3.9% in 2006, as house prices rose by 9.1%. The housing market accounted for about 10% of GDP in Spain that year, fueled by strong demand from investors both inside and outside Spain.
The Organization for Economic Cooperation and Development said at the end of May that it’s expecting Spanish GDP to grow by around 3.6% in 2007 and 2.7% in 2008.
The OECD also said a sharp correction in the Spanish property market is the main risk to healthy economic growth as residential construction accounts for such a high share of GDP.
“The Spanish housing sector is oversized, representing almost 10% of gross domestic product in 2006,” economists at Goldman Sachs concurred in a recent note to clients.
Rates, demand pose risks
Interest rates also represent a great risk.
The European Central Bank, which sets rates for the 13 countries that use the euro, including Spain, has raised rates eight times in 19 months to the current level of 4%. The tightenings have been in response to strengthening growth in the euro zone, mostly in Germany.
The ECB recently intimated that it will probably continue to raise European rates this year, while investors have also recently stopped hoping for a rate cut in the U.S. Rates in Britain are also seen rising.
Buyers around the globe, including those in Spain, are clearly watching these developments as they decide how much debt they can handle. Many property buyers have taken advantage of recent low rates to buy up assets, especially houses.
Demand is another potential minefield
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Construction rates in Spain are running at roughly 800,000 new homes a year, noted Lombard Street’s Dumas, against demand for around 600,000 homes. That’s more than the total number of homes constructed in Italy, France and Germany combined.
“Spain has more homes per 1,000 head of population than any other country in Europe and they continue to add to it, resulting in record levels of household debt,” said Dumas.
Both houses and apartments are being built right across the country in urban and coastal regions to meet demand from inside and outside Spain.
Apartments are being constructed in the cities for the local population and intra-country commuters, and on the southern coast for holiday makers, said Alexander Vaughn, a partner at Lucas Fox estate agency in Barcelona. Owners from outside Spain are from the U.K, and Ireland, as well as Northern Europe and the U.S.
IPOs shed light on sentiment
Just how investors are feeling about the sector can, perhaps, be seen in the performance of listings on the Madrid exchange.
Property investment firm Realia Business, for example, was forced at the beginning of June to lower its initial public offer price to 6.50 euros a share vs. a previous range of 7.90 euros to 9.70 euros a share. The final price valued the company at around 1.8 billion euros.
“The IPO has been launched just as the market is questioning how sustainable property-sector growth may be and how a soft landing may be managed,” noted Javier Hombira, an analyst at Spain’s Ahorro Corporacion Financiera in a note to clients. “This has resulted in a somewhat cool market reception for the IPO.”
Hoping to avoid a slump
The best scenario for the Spanish housing market would be a continued, gentle softening.
House price inflation peaked at almost 20% two years ago before moderating to growth of 7.2% in the first quartet of 2007. Analysts believe that if this trend continues, the market may avoid a sharp correction.
“We expect (the housing market in Spain) to downsize gradually, dragging down GDP growth at the end of 2007 and into 2008,” said the Goldman Sachs economists.
Even if GDP does decline somewhat, it’s still expected to rise by an average of 3.6% in 2007, which is “hardly a weak number,” they added.
Observers also note marked differences within the Spanish property market itself, meaning slump in one area doesn’t necessarily mean a total market. ” Everyone tends to lump the Spanish property market together,” said Lucas Fox’s Vaughn.
Although coastal areas in the south are having problems in terms of sales right now — mainly due to oversupply - the same can’t be said of Barcelona, which is the country’s second-biggest city.
‘The market is holding up well in Barcelona,” Vaughn said, adding that prices are expected to rise by between 5% and 7% this year.
Still, it’s below the 10% rise in Barcelona property prices last year, and Vaughn concedes that the market has softened slightly.
“In 2007, the market’s not as fierce as it was. Properties may be taking a bit longer to sell,” he said.
- Source: Dow Jones, via CNN.com, June 19, 2007
Good news for those intending to buy property in Spain. Bad news for those who want to sell:
Property experts are nervously watching the Spanish housing market as fears mount that it could be about to implode.
If it does, the 250,000 Britons who decided to live the dream of a life in the sun could find themselves trapped in a nightmare.
The Spanish property market, which had been one of the strongest in Europe with double-digit inflation since the early 1990s, has ground to a halt. Worse still, prices are falling in many areas.
The Costa del Sol is taking a battering, largely due to a flood of development properties suffocating the market. But it has also been hammered by corruption scandals, rising crime and interest rate hikes.
The Costa Brava appears to be holding its own, for the time being at least.
Knight Frank research partner Nick Barnes said: “We have reached the position in some areas that unless a property is exceptional and ticks every box for the buyer, you will struggle to sell it at the asking price and will have to be prepared to accept less.”
Mike Boles, a director at Savill’s international division went further. He said: “It is hard to be categorical about what precisely is happening to prices, as so little is selling.”
The Spanish property market is in a league of its own. According to the Royal Institution of Chartered Surveyors (RICS) 2007 European Review, home ownership is among the highest in the EU, at 82%. Similarly, most household wealth (87%) is tied up in property, including 21% in second homes. This makes the ordinary Spaniard particularly vulnerable to price fluctuations.
Demand for property should be falling because of the collapsing birth rate. Spain, with Italy, now has the lowest birth rate in the EU, with women having just 1.3 children on average.
However, demand for property has until now remained strong, perhaps because Spain has the highest rate of immigration in Europe, reaching 640,000 in 2005 and accounting for almost half the net immigration into the EU.
David Stubbs, senior economist at RICS, said: “This group is made up predominantly of older people from north-west Europe, particularly the UK, who wish to settle in the sun but not participate in the labour market. They are the mainstay of demand in the coastal and other tourist areas.
“But others come from central and eastern Europe, Africa and Latin America and migrate for economic reasons. However, low incomes prevent this latter group from entering the property market.”
There is no doubt that Britons have flocked to Spain, drawn by the sunshine, easy living, cheap property and lower taxes.
Against this background, developers began building at record rates, which made Spain the most prolific builder in Europe. Last year more than 750,000 properties were started, again mainly around the coastal resort areas. This is more than treble the 200,000 annual builds which characterised the market for most of the 1990s.
Spanish property development continued to expand, until it reached the current position where big chunks are looking unsaleable, certainly in the short term, or without huge discounts.
For this reason the share prices of a number of big developers slumped last week, fuelling speculation that the market is about to collapse.
- Source: Scotland on Sunday, Apr. 29, 2007