Borja Mateo: buying a home in Spain is 'madness'

Borja Mateo: buying a home is 'madness'

Amid a rebound in housing sales statistics, Spanish property analyst Borja Mateo delivers an uncomfortable message: house prices have fallen between 53% and 58% from their peak, but the average drop should reach 75%-85%. 'Buying is first-rate madness,' he declares in an interview with Fotocasa, where he recommends renting and renegotiating existing contracts. The apparent recovery of the sector, he argues, is merely the logical rebound of a collapse that still has further to go.

Mateo's thesis rests on three pillars: adverse demographics, an unmanageable housing stock and a tax policy that drives away foreign investors. In the 15 to 29 age group there is 57% less population than in the 30 to 43 group, while the country has five million homes sitting empty, for sale, for rent or under construction. With that equation, any revival in demand is a mirage.

Why does Borja Mateo say buying is madness?

Because, according to his analysis, the downward cycle is not over. Mateo places the start of the adjustment in the second half of 2006, when actual transaction prices began to fall. Since then, transactions between private parties have accumulated cuts of 53%-58%. Far from seeing this as bad news, he interprets it as the only mechanism that revives demand. The problem is that the floor has not yet been reached: his forecast is an average fall of 75%-85%, with areas such as the coasts of Granada and Almería already registering collapses of 80% for two years now.

The argument is completed by the evolution of rents. Mateo says rental prices have had to fall 40%-45% since early 2007, a trend he attributes to three legal reforms that make it easier to evict defaulting tenants. As the supply of rental homes increases, prices fall and the owner's return suffers. 'Anyone paying the same rent now as a year ago is doing something very, very wrong,' he says.

The calculation that demolishes buying as an investment

Mateo breaks down the real return on a rental property: between 3.75% and 4% net after expenses. But recovering those expenses takes between two and a half and three years, the average rate of disputes with tenants is 17% and the time to recover a property after a default stands at nine months. Under those conditions, today's buyer acquires, in his words, 'a distressed debt fund'. Rising interest rates, in a market with falling yields, no liquidity and increasing taxation, will suffocate those who take out a mortgage now.

The comparison with bank deposits is inevitable. Mateo points out that many investors reject the 1% a bank offers on a deposit, without realising that, in a deflationary process, that 1% is a positive return in real terms. Greed, he says, is pushing many people into 'the disastrous decision' of buying a home.

The rental market: trend or mirage?

For Mateo, the growth of renting 'is here to stay'. His explanation goes back to the formation of the bubble: the lack of rental housing supply was, in his view, the most significant factor. The Spanish state had no interest in protecting owners with fast evictions because that would have encouraged renting instead of buying, with the resulting taxes. Now that the state has changed its stance, more homes are coming onto the market and prices are being pushed down.

Not everyone shares this diagnosis. In the subsequent debate, some point out that in cities like Zaragoza there are no rentals below 400 euros a month and that figure has not dropped in years. The discrepancy between the national average and local reality is one of the flashpoints: while some speak of collapses of 40%-45%, others see stagnation in tight markets.

Foreign investors and tax policy

Mateo downplays the role of foreign capital: only 1.6% of homes sold are bought by non-resident foreigners. The tax reform of mid-2012, he argues, has scared off high-net-worth investors, who have moved to Portugal. The golden visas for large fortunes have been a failure: only 72 have been granted. His prescription is less state and more oversight of public activity, in line with what, according to him, France and Italy do.

On public housing, his position is radical: eliminate it entirely, because 'it has fostered greed and discrimination based on people's economic gender'. And he adds: the faster the eviction for non-payment of rent, the more homes will come onto the market and the more prices will fall. An opinion that, in the 2014 context, leaves no one indifferent.

The gap between rhetoric and reality

The conversation turned to a more uncomfortable issue: the supposed reluctance of owners to lower prices. Some argue that in Zaragoza sellers remain anchored to bubble prices and only react when they see months of vacancy. The recommendation of offering six months' rent in advance or looking for homes that have been on the market a long time appears as a negotiating tactic.

Scepticism also extends to Mateo himself. Some doubt that a home bought today for 120,000 euros will be worth 60,000 in five years, as his scenario suggests. Others point out that the analyst lives in rented accommodation in London, a detail that, for his critics, delegitimises his preaching. The underlying question remains unanswered: how long do we have to wait before buying stops being madness?

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Key figures

• Price fall from peak: 53%-58% in transactions between private parties
• Forecast average drop: 75%-85%
• Rents: fall of 40%-45% since early 2007
• Net rental yield: 3.75%-4% after expenses
• Homes empty, for sale, for rent or under construction: 5 million
• Population aged 15 to 29: 57% less than the 30 to 43 group
• Purchases by non-resident foreigners: 1.6% of the total
• Golden visas for large fortunes granted: 72

Will the market keep proving right those who advise waiting, or will the rebound in sales mark a floor that nobody saw coming?