Citywire for Financial Professionals
Stay connected:

View the article online at http://citywire.co.uk/money/article/a486424

Is it time to buy Spanish homes again?

Linton Chiswick reports on a rare bit of good news for Spanish property investors - and considers whether it'll last.

 
Is it time to buy Spanish homes again?

Linton Chiswick reports on a rare bit of good news for Spanish property owners - and considers whether it'll last. 

Spain’s Minister for Public Works, José Blanco, will – according to Spanish newspapers – make London the first stop in an international 'property roadshow' to promote Spanish coastal property to overseas investors and attempt to spread the message: it’s safe, possibly even sensible, to invest in Spanish property.

No doubt, he will draw on recent Bank of Spain data showing foreign investment in Spanish property rising for the first time since the dog days of the property bubble, up 2.9% in 2010. It’s a modest rise, but it’s a Euro rise at a time when property values are decreasing, and it’s a rise that really took off in Q4, suggesting that a trend that might continue in 2011.

The sceptics – on the other hand – can point out that the 2.9% rise follows a 31.5% fall-off in the previous year, that the Bank of Spain expects prices to continue falling, and that a recent industry poll by CB Richard Ellis showed 75% of respondents fully expecting a negative outlook for Spain’s property market this year.

There’s no denying the scale of the recent rout. The official bank line is that property prices have fallen 17% since 2007, but that’s a valuation rather than completion index. Different independent analysts estimate falls of anywhere between 20% and 50% depending on the location, with the heaviest blows struck to regions where overdevelopment was most persistent. There are more than half a million new homes lying empty, another quarter of a million half-finished. In total, there are somewhere between one and two million Spanish homes lying empty. To add a little perspective, there were fewer than half a million completions in the whole of 2010.

But Blanco isn’t a lone voice. On the basis that a good investor doesn’t wait for proof that a market has bottomed out before buying into it, but just tries to time a purchase as close to the bottom as possible, there have been plenty of recent reports claiming Spanish property’s officially, now, good value and on the point of becoming a firm 'buy'. Millions of pounds have been shaved from the top end of the market. The poor exchange rate has developers bending over backwards to accommodate their traditional UK clients.

Enthusiasts also argue that the market can only fall so far. A generation of Spanish homeowners might be in negative equity, but the Spanish system (unlike the American one, and more like our own) doesn’t reward people for handing the keys back to the bank. Defaulting Spanish borrowers remain liable for the whole mortgage, so they’re much better off fighting to keep their homes.

And as for the Bank of Spain’s own forecast that residential property prices will continue falling, it’s based on their own flawed index, taken and compared to retrospective data from previous house price slumps. If recent falls have been more like 30% or more, the market’s likely to be much closer to its lowest point than they’ve forecast.

It’s also in the government’s interest to protect the house prices wherever possible.

The Spanish economy’s relationship with residential property is complicated and interdependent. While the savings banks (or cajas) that account for the half the country’s banking sector are saddled with under-performing properties, their ability to service the economy with credit suffers.

When José Blanco embarks on his tour, he’s said to be likely to promise measures to safeguard foreign investors' legal concerns, following (continuing) issues about illegal homes, resulting in properties being demolished after developers failed to follow property planning procedure.

So is it time to start buying Spanish property? With so many empty properties, and with Euro-mortgages in short supply, there’s little danger of a new boom grabbing property prices and hurtling them skyward in the short term. Even if prices are near to their trough, it’s likely to remain a buyers’ market in Spain for some time.

37 comments so far. Why not have your say?

Chuck

Apr 13, 2011 at 12:26

So... With Portugal (and previously Greece) requiring a bailout, possibly impacting the survival of the Euro currency, is now the time to enter a 25year+ debt commitment to buy an illiquid asset?

My answer is no. Imagine what will happen if the Euro doesn’t survive – what happens to your Euro mortgage then?

If you live in the UK, you are better of buying UK property, the Bank of England have no shown that you cannot lose now. Any problems with house price falls and they cut interest rates because of over indebted individuals and the retail/investment banks’ exposure to property - and they have the sovereign currency to do this, unlike Spain.

report this

peter hart

Apr 13, 2011 at 12:44

Dont do it. Simples.

report this

Roberto Birquet

Apr 13, 2011 at 13:31

Chuck

If you live in the UK, you are better of buying UK property, the Bank of England have no shown that you cannot lose now. Any problems with house price falls and they cut interest rates because of over indebted individuals and the retail/investment banks’ exposure to propertySpain.

---------

This is a disgrace. Not only are FTBers' taxes being used to make sure they are never able to afford a home, while lining the pockets of the bankers whoc caused this mess, but the economics is crazy.

By bailing out bankers, borrowers and the rest, precious resources are being lost to the real economy. Were prices allowed to fall, FTBers could join the market. But not only is one generation being locked out, but the next generation is, too.

The bad debts could be put into a "bad bank".

High street banks could get off in exchange for parts of their business (ier parts nationalised and the banks become smaller). These could be privatised at a later date to help pay for the bad bank. The privatisations could be used to force more competition in banking and wider particpation (banks, AND building societies etc).

The return of business as usual is madness as well as disgusting (bonuses etc). This givernment will deserve to fall too. Your taxes are going to the banks insteead of schools and hospitals. Why are people not getting angry about this? We're all in it together? Yeah, all the debtors.

report this

Chuck

Apr 13, 2011 at 14:00

@Roberto Birquet

Yes, you can argue it is a disgrace, there is the definite presence of moral hazard regarding property speculation. You can see a microcosm of this on this website where some (supposed) landlords comment on how great a time it is, how they are lining their pockets, and looking to buy further property (as opposed to paying down debt) knowing that the BoE is not going to follow their remit - so their leveraged investment strategy is safe.

Does it make me angry? What is the point? Better to just join them. As a strategy to make money from property, the BoE has incentivised all of us (who can) to leverage up and load up on property in the next 2 years. Interest rates will be at 2%, the economy recovering, and the property increases (and lack of a crash) will be fresh in everyone’s mind. Buying UK residential property really is a one-way bet to nominal gains, the BoE has made it so.

report this

Martin Drew

Apr 13, 2011 at 14:17

"Buying UK residential property really is a one-way bet to nominal gains"

With oil prices heading north, the UK economy stagnating and salaries static or even dropping I think you may be right in that it is a one way bet, but to losses not gains.

House prices will eventually pick up - but I suspect they still have further to go down before that happens.

report this

Anonymous 1 needed this 'off the record'

Apr 13, 2011 at 14:17

property prices could go even lower when goverment workers get kicked out of there jobs.but house prices could up when more illegal ore asylum seekers keep coming in who need houses.pensions based on btl are on the up but big deposites required to buy houses are stopping the market.non uk workers given work before english and job movement not as good as it was does not look good for the housing market.cheap houses bought up by the btl stopping the first time starters getting on the market at a reasonable price.lottery is term for the housing market in england and to many horror storys about who owns the land and uncompleted houses in spain

report this

Mike1

Apr 13, 2011 at 14:28

I thought we were still working through over-valued assets? With 1 out of every 4 pounds of government spend borrowed, loads of unfunded promises and high personal debts, I would have thought that a bit more settling down was on the way in the UK? And in Greece, Ireland, Portugal, Spain.....

report this

PedroKTFC

Apr 13, 2011 at 14:29

I think it might well be a good idea! It'll provide some cover for when we're forced into the euro when this rabble, sorry coalition, have so ruined our economy the only bailout we'll be allowed is to join the euro!

report this

philip bird

Apr 13, 2011 at 14:53

maybe try Portugal or greece?

report this

Dislexic Landlord

Apr 13, 2011 at 14:53

If I wanted to live in Spin which I dont at this time WHICH I DONT I would rent

Keep your money in uk property it far less risk

The Spanish market has been over sold for years and the prices and the risks are just too high

report this

Rose G

Apr 13, 2011 at 15:08

After watching the programme of homes from hell, I would never contemplate buying in Spain, even if there was a property I could afford.

The many Brits who have lost all their money investing in properties which have been built with no planning permission is the saddest story ever!

Spain, like many other countries whose economies rely mainly on the tourist trade, have spoilt miles of their coastline - I could not live in such built up areas, although looking at the mainly underdeveloped where there is not even a road there, seems attractive, but because the property laws & their government treat the Brits like second class citizens, then I would definitely not want to build my home on foundations of sand.

report this

new model adviser

Apr 13, 2011 at 15:09

The UK housing market is 1-2 yrs behind the US, Ireland and Spain due to the fact that interest rates will need to go back to their long term average. Huge wage rises in emerging markets coupled with high commodity prices will lead to higher prices in the shops as inflation returns. Too many people are leveraged up to their eye balls as they took out so called liar loans and the interest rates on these will continue to rise.

The falls won't be as bad due to supply and demand pressures but unfortunately there will still be a lot of repossed properties in 2-3 yrs time as interest rates tick upwards.

report this

Anthony Coles

Apr 13, 2011 at 16:49

I would like to meet Mr Blanco and suggest the Bank of Spain return my 100,000 euros currently sat in a Spanish Bank Account and I would consider spending time back in his 3rd world country...

report this

john gale

Apr 13, 2011 at 17:34

the value of property in the balance sheets of spanish banks is vastly overstated. when this is regularised spanish property prices could fall heavily . i personally would not touch a spanish property unless the price was around 70 percent vlower than the peak.

the situation in uk is so bad that i would have thought that the uk would be the last place on mr blancos list . what spanish buying is taking place is coming from scandinavia with a little from holland. belgium because of heavy immigration of people from non eu countries.

report this

jeff lampert

Apr 13, 2011 at 19:07

Apparently there are about 1.5m Spanish properties in various states of completion for sale.

I would think Spain is probably the last place I would buy for an investment, even behind Ireland!

I think "it is likely to remain a buyers market for sometime" is the understatemebt of the year!

report this

AT

Apr 13, 2011 at 19:19

According to the Economist, Spain (along with the UK, Australia and HK) is still one of the most overvalued property markets in the world. That's also my experience (I am a potential buyer there). Virtually nothing is selling there either.

Find out the net annual rent yield and multiply by 15 - if the result is less than the asking price it is overvalued. The only markets that are not at least partly overvalued at the moment seem to be parts of the US. Given the low rents, Spanish property needs to be pretty cheap and it isn't.

Don't buy real estate anywhere until these bubbles have properly unwound.

report this

In the Dark

Apr 13, 2011 at 19:39

Is it good news, may be, but you have to do your homework, there are some good properties to be had and then there are the basket cases, just like in the UK. In the mean time while you are just looking or fancy time away you can always rent my little abode on the Costa Blanca.

http://www.rentalsystems.com/book/spanishgetaway

report this

Jonathan

Apr 13, 2011 at 20:06

If something triples in price then halves, it is still overpriced.

report this

Ian W

Apr 13, 2011 at 20:57

Been there (Canaries at least), done that! Circumstances changed and we sold up in 2005 with a decent capital gain following 10yrs of very good rental income. When we sold 8 out of the 10 viewings we had were Irish folks, so where are the potential buyers coming from now?

Like the UK there isn't a single property market, lots of local markets with different characteristics. As a long term investment, with lots of research and a good understanding of the local market, good opportunties will be there for the canny buyer. However, avoid the over-developed areas like Costa Blanca and new builds - the usual hunting grounds of those who later appear on "Holiday Homes from Hell"!!

report this

Roberto Birquet

Apr 14, 2011 at 12:39

Does it make me angry? What is the point?

-----------------

It should. We are piling up enormous problems for the entire economy, and that means for you and your family.

Most FTBs currently cannot buy. That has nothing to do wiith required deposits. It's because prices are too high. If there is a FTB house for £250K in the east end of London, the FTB is gonna need a very well paid job. There just aren't enough of such people.

If this generation and the next (your kids and grandkids) is locked out of the market, then pension provision in the form of housing benefit will go through the roof in 20-30 years time, as people will still have rent to pay when retired. That will destroy our social system.

The only reason prices have not fallen further (down only 15% from peak in nominal terms) is that banks' balance sheets would be crushed. If a repossessed house sells for £150,000 rather than the £250,000 valuation of 2007, then the bank has to write down the value of all similar property by 40%. It would then have to raise funds to pay for that shortfall, meaning lower profits for the banks. Banks have no right to continue with the big bonuses, as they are not making real money; they are hiding their debts and using quantative easings - free money given to them that devalues our own money.

In order to do this, taxpayers are paying down govt debt, and losing out on public services; interest rates which would normally be over 7% on current inflation pressures are at just 0.5%. Savers are losing around 6.5%. This will lower the value of money, and encourage people into more debt. Were that for investment in the real economy, it may make sense.

But it is not. It is to pay for bricks on land. Bricks that remain in a bubble. Bricks that do nothing to increase the wealth of the nation. We may as well adopt the leaf as our national currency; stuff ourselves full of them, and call ourselves millionaires (with thanks to Douglas Adams). You may see an opportunity in all of this. But the economy will pay big time, and that means you and your kids. If it all blows up again, the state could go bankrupt, as in Ireland. That's the big picture.

report this

James Rampley

Apr 14, 2011 at 14:12

As always location is key - look for motivated sellers in the established upmarket areas and if concerned about euro depreciation take out a high ltv mortgage with low redemption fees and pay off in a couple of years when euro situation will be clearer.

Nearly always impossible to call exact bottom of market but now is the best time to buy compared with any over last five years.

report this

Jonathan

Apr 14, 2011 at 14:23

Ian W, I heard someone say when they went to Ireland to "Last time I came here you all had white skin and red hair, now it's the other way round". I know now where the red faces came from :)

report this

Roberto Birquet

Apr 14, 2011 at 14:53

According to the Economist, Spain (along with the UK, Australia and HK) is still one of the most overvalued property markets in the world. That's also my experience (I am a potential buyer there). Virtually nothing is selling there either.

Find out the net annual rent yield and multiply by 15 - if the result is less than the asking price it is overvalued.

Don't buy real estate anywhere until these bubbles have properly unwound.

-----------

I've not been an "investor", so although I see what you're doing - finding yiled to guess whether sth is cheap or not, I don't know the figures/algorithms. But they would be worth knowing.

Can you explain your figures?: net yield and multiply by 15. Is that some established rule of thumb, and tis there any source you can point to to verify that?

report this

Chuck

Apr 14, 2011 at 15:20

Does it make me angry? What is the point?

-----------------

It should. We are piling up enormous problems for the entire economy, and that means for you and your family.

Well, it is wasted energy being angry now… The market can remain irrational longer than you can stay angry.

You learn from life, there is no point “doing the right thing”. For example, what was the point of saving from circa 2000, paying for your own education, improving your job prospects, clearing debt early and saving so that you have no debt; making sacrifices (i.e. no holidays, no car, no xbox, no flat screen, etc), only so that the spivs who lied about their income to buy houses, make more money than you every have because they are now rescued using your savings?

Don’t be the sucker this time around. Jump on the merry-go round. The BoE is not doing their job – medium term inflation has been above target now for 2 years. CPI is 4% now, base rate at 0.5%. They are not going to raise rates, the reckless businesses, spivs and property speculators are not going to face the hardship of their excesses – you are. If you don’t join them, you just end up paying for them.

report this

john gale

Apr 14, 2011 at 17:53

james r . i hear what you have to say but prices range from 3000 euros per square metre to 900 per square metre in spain whereas in usa i can buy at around 700 ind we at least know that usa is improving slowly . i did read today that china is considering bailing out spanish banks. only reason i can think of is that they are heavily into spanish bonds. anything you buy now will take you at least 5 years to make any reasonable profit and things could go down a lot from here.

report this

D Wood

Apr 14, 2011 at 18:09

People have told me stories where their Spanish property has been broken in, the place completely cleared out and even the electrical cable in the walls stolen. How do you know if anything happens when you live miles away.

report this

AT

Apr 14, 2011 at 21:51

Can you explain your figures?: net yield and multiply by 15. Is that some established rule of thumb, and tis there any source you can point to to verify that?

You're looking for long term average yield on an investment to be around 7%. If it's a bank account you use interest rate, shares it's PE ratio and real estate net rental yield. Mug property investors are obsessed with the capital value....an easy way to come unstuck especially if you're in debt up to your eyeballs. Multiplying by 15 takes you to roughly the long term median yield. 15 years into a global property bubble and very few places make the grade, but they will....unless you believe this time is different.

If I was a bank now I'd be building up capital to deal with the eventual mega write downs on property secured loans which are likely to be faced at some point in the UK...just like they already have in Ireland and very soon in Spain.

report this

Ian W

Apr 14, 2011 at 22:06

@ Jonathan - The guy who bought our apartment was a retired businessman with interests in Ireland and the UK who was a cash buyer. He bought the apartment for his own use, not as an "investment", and for the use as a holiday home by his grown-up family and grandchildren without need to rent it out to cover the running costs. AFAIK his face is still white and his hair still red, though I do understand your point about those who over-extended themselves because everyone else did and the investment looked a sure bet because "prices only ever go up".

report this

Marino

Apr 15, 2011 at 09:05

If you want ot buy a property on the coast in Europe now is the time to invest in Spain. Prices are increasing now as germans are buying again. Do not forget to buy directly from spanish banks stocks. You would get the best financial conditions you can imagine. Who is saying that UK real state is safer, i have seen it going down faster than the spanish. Think of the alternatives on the coast, 2 hour flihgt from ec : Portugal, Greece, N Africa... Tell me where do you get the same Social cover, infrastructure network, etc. while you are thinking Germans are buying.

report this

Roberto Birquet

Apr 15, 2011 at 13:47

Marino

If you want ot buy a property on the coast in Europe now is the time to invest in Spain.

----------

The one scary and unpredictable factor is the currency. What is going to happen to ther euro? Three countries down, defaults certain in the case of Greece and Ireland, I think. If Spain is next, all bets are off.

The pound has fallen by 15-20% againthe euro. so if the price of Spanish villa has fallen by 35%, it has only dropped by 20% in pounds. What happens if the euro crashes - of which there is a definite chance? Your investment will be toast.

I am sure asking prices are silly, and people are trying to ignore the end of the banking boom (markets are irrational). The same is true in the UK. Prices here have not fallen by much - about 15% from avg of £192K to £162K - because banks are refusing to repossess those not paying their mortgage as they are scared witless at the effect on their balance sheets; while the amount of people who HAVE TO sell has fallen because of the ultra-low emergency interest rates. Under a normal market system, interest rates at the BoE would be 7% (2-3% above inflation).

That would create an enormous jump in payments. If you are on a £150K mortgage. and your floating rate is 2.5 pc points above the base rate, you only pay £718 a month. If rates suddently have to rise because of an inflation scare and threat to the economy, and base rose to 7% (far lower than in the 90s), your payments would rise to £1,324 a month (an 84% rise).

There are a lot of people with their heads in the sand on this. The amount of properties that would come onto the market in that situation would cause an enormous crash - like Ireland or Japan. We are playing with fire. It is wrong, deeply unfair, and potentially catastrophic for the economy; and is a disaster as I said before for the social security system of the future. And all to bailout millionaire bankers, who habve NOT earned their money.

report this

Anonymous 2 needed this 'off the record'

Apr 15, 2011 at 17:37

@Marino

Fantastic ! The Germans are buying up all the Spanish property. This means when I go on holiday this summer I will be able to get a sunbed :)

report this

john gale

Apr 15, 2011 at 18:23

marino. its simply not true to say that the germans are buying . there has always been a trickle of german buyers but i have no evidence in spain of more german buying. the euro will survive if only because the chinese who have bought bonds will not let it go but you might get a two tier euro with germany and france on the first tier but if spain was in the second tier the likely overnight depreciation is around 40 percent.

then of course the buying would start. my advice unless you can buy a good property at below 1000 euros per square metre is to wait and see what happens.

report this

bob naybour

Apr 16, 2011 at 01:08

No rent if you want ti live in spain and preserve your cash . Why buy ??

report this

Steve123

Apr 17, 2011 at 13:09

A quick calculation on information from yesterday’s Times shows that Spanish property has another 41% to fall. The article said that Spanish property increased by 106% from 2000 to its peak, that it is currently 18% below its peak, and that commentators think that it will go back down to its year 2000 prices due to the economic problems and massive over-supply of new homes. A few quick calculations shows that current prices therefore need to fall by another 41% to get back to their year 2000 levels.

report this

Roberto Birquet

Apr 18, 2011 at 11:12

Here is the thing. The world economy imploded because of property bubbles. The credit boom that destroyed banks was from banks selling mortgage-backed bonds to financiers who did not understand what they were buying; once they did the music stopped and the world went BUST!

Now, Europe, Britain and the US have artificially low interest rates (they are supoposed to be at least 2pc points higher than inflation if markets are functioning well; ie 7pc plus rather than 0.5pc). In order to bail out the banks, and then consumers, and then consumer confidence, they have slashed rates. The authorities do not know where this will end. The fear is real that inflation will rip. If that happens, what will be the impact on housing market?

1. Rates will rise and big time, payments will rise. A £150K mortgage on flaoting rate will go from £750 to £1,300 pcm, and that will force sellers to take available offers. (Currently people are not selling in much numbers: in the UK volumes are lower than ever recorded - last 20 years - and by some way: 60,000 at bottom of 90s market; now just 40,000 per month)

2. on the positive side, inflation will erode the value of your debt. If you know you can pay at higher interest rates when they come, it could work: IF you can't, it's Russian Roulette, and you could go bust. And I do not believe we can have bailout after bailout after bailout.

The only cert is gold will keep rising. It is becoming a currency again.

report this

jeff lampert

Apr 18, 2011 at 11:30

Roberto

I totally agree.

Getting back on track, I suggest with apparently 1,000,000 plus more properties on the market in Spain than there are buyers now is NOT the time to buy.

Say 3 years, when whatever we are going through as an advanced economy becomes clearer?

FWIW I believe Madoff will be eventually appreciated as the equivalent of Keynes! We have all fallen for various Ponzi schemes.

http://www.accountingweb.co.uk/blogs/jefflcbba/mad-lemming/1500000000000

report this

simms

Sep 25, 2011 at 09:41

if you can get as big a spanish mortgage or greek mortgage today, fill your boots. why you ask?

The reason is that if you put down on 10% in sterling today and wait for default all mortgages in greece and spain will be converted back to pesetas and drachma. The result is probably a 40% devaluation of your mortgage in these currencies. you may contest mortgages will be converted but if you do your research this is what will happen. however your property will also devalue by 40% so can you win this case? Firstly remember that if property in greece devalue 40% there will be a flood of buyers helping themselves and this process will push up the prices. If you look at London property the primary catalyst for the recent boom has been foreigners taking advantage of our 25-40% depreciation against most world currencies in the last 5 years. Plenty of greeks and spanish have been doing just this to protect their wealth as the UK will be a relatively safe haven in the euro, and not forget the probable US meltdown. In these times the swissie, yen and dare i say sterling will come to the fore.

If you are smart you can also find mortgages in greece and spain where you do not need to pay anything in interest and capital for 1-3 years so you are also hedged against high interest rates when they do default. Spain is particularly good at the moment with the recent cut in IVA on new build to 4% from 8% so not much upfront payment.

I know investors who have bought 5 properties in greece and now waiting for the default (inevitable) and highly likely next step of leaveingto the euro. if only the default happens the euro wil fall up to 10-20% but if greece leaves the euro then we are probably looking at 30-40%. Its probably a one time opportunity.

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire guide to investment trusts

In association with Aberdeen Asset Management

Fund managers from Standard Life Investments quizzed on investment trusts


What can SLI bring to the table for those who want to put their money into investment trusts?

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add noreply@emails.citywire.co.uk to your safe senders list so we don't get junked.

Read more...

Aviva agrees £5bn deal to buy rival Friends Life

by Daniel Grote on Nov 21, 2014 at 18:16

Sorry, this link is not
quite ready yet