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Severe housing glut in
Spain, economy slides
Spain’s housing market is heading south. House prices are falling, and there is a glut of newly-built houses.
House prices fell 4.27% in inflation-adjusted terms during the year to Q3 2008. The housing bubble burst in late-2007, and average house prices in Madrid, the capital, fell to €2,895 per sq. m. in Q3 2008, down 3.7% from Q4 2007, according to figures from the Bank of Spain. The price falls in 2008 are in sharp contrast to double digit price increases from 2001 to 2006.
And these are the official statistics. The statistics are widely disbelieved, even by the Minister of Housing.
“The latest overall data that I have seen for the last 12 to 14 months points towards a big fall, of at least 15%,” said Beatriz Corredor, Minister of Housing, on November 10 on Spanish TV. “Anyone who wants to buy will definitely be seeing a fall in real prices. It’s unanimous; all the statistics reflect a fall, it’s a reality that we now can’t deny.”
More Global Property Guide pages:
Spain housing market research - in-depth
Latest property news
Blogs and forums about Spain
A flurry of retractions amowed, since the Minister’s numbers flatly contradict the official statistics.
The housing glut is most severe along the coast and in areas around Madrid, and is expected to deteriorate to around 1 million homes unsold. The number of unsold newbuild homes rose to 503,000 in June 2008, 22% up on six months earlier, according to the Ministry of Housing.
The Spanish economy contracted 0.2% y-o-y to Q3 2008, the first contraction since 1993. The economy is expected to officially enter recession in the fourth quarter of 2008. The government announced an €11 billion stimulus package this November, aimed to create 300,000 jobs, on top of previously announced economic relief measures, including a €40 billion mortgage relief package, tax cuts, and credit lines for new business. GDP is likely to shrink by as much as 1% in 2009.
Interest rate hikes
Spain’s housing market is extremely vulnerable to interest rate changes, due to the use of adjustable rate mortgages. More than 80% of new mortgages have had initial rate fixations of less than 1 year since 2004 (more than 90% of new loans from 2005 to 2006).
Mortgages with fixed rates of 5 years plus have not exceeded 6% of the total since data was first collected in 2003.
The great Spanish housing boom was powered by 15 years of dramatic reductions in mortgage interest rates, from 17% in 1991, to 10%–12% (1995 to 1996), to below 3.5% (2004 – 2005) - among the lowest rates in Europe.
Mortgage rates rose quickly during 2006 to 2007. They rose above 6% in August 2008.
Higher interest rates and tighter mortgage conditions have dramatically pushed down the volume of new mortgages:
From 2005 to 2006, new mortgages averaged €13.5 billion monthly.
New mortgages have declined to around €5.2 billion monthly from August to October 2008.
Spectacular mortgage market growth
Spaniards traditionally did not finance house-purchases through mortgages. But the liberalization of the mortgage market since the 1990s changed all that.
The mortgage market grew by more than 20% annually from 2003 to 2006; although the growth slowed to 14% in 2007. The value of outstanding loans for house purchase soared 254% from €181 billion in 2000, to €642 billion in 2007.
In proportion to GDP, mortgage outstanding have grown from 14% of GDP in 1990, to 29% in 2000, and to more than 61% by end-2007.
Generous tax breaks for mortgage interest payments and capital repayments helped fuel mortgage growth.
Income tax deductions reduce effective interest rates on Spanish mortgages by 2 percentage points, according to an OECD study, and real after-tax interest rates have been negative since 1999 (the study was published in 2004). The subsidies effectively allow homebuyers to increase their total borrowings by 15% to 20%.
Housing savings schemes are also given tax breaks. Imputed rent for owner-occupied houses, and capital gains on the sale of the primary residence, are also tax-exempt.
South coast resilient?
Outside Madrid, house prices are highest on the Mediterranean Coast: Catalona, Andalucia and Valencia. These regions saw the highest house price increases during the boom, more than 200% from 1996 to 2007. In Andalucia, the region with Spain’s longest coastline, prices rose 243% over the same period.
Around 14% of the housing stock in 2001 was second homes, and the share has definitely risen since. Hundreds of thousands of foreigners, mainly from the UK, France and Germany, have joined Spanish buyers.
The average price of houses in Cataluña (the Spanish spelling), which shares its border with France, was €2,471 per sq. m. in Q3 2008. Aside from Madrid, it is the only autonomous community with house prices higher than the national average.
SPAIN
HOUSE PRICES PRICE- Q3 08
(€/ SQ. M.) PRICE CHANGE (1996 -2007) PRICE CHANGE (Q108 – Q308)
Spain 2,069 181% -1.6%
Madrid 2,895 178% -3.7%
Cataluña 2,471 214% 0.5%
Andalucia 1,781 243% -1.1%
Valencia 1,659 227% -1.5%
Galicia 1,566 149% -0.4%
Castilla-Leon 1,489 138% -2.2%
Source: Bank of Spain
House prices along the coast have shown resilience during the crash. Average house prices started falling after the first quarter of 2008, except in Cataluña where prices only started declining in Q3 08.
Massive oversupply
Oversupply of new housing units is exacerbating the problem.
From 1990 to 1998, less than 300,000 dwellings were completed annually.
By 2001 to 2003, with house prices rising rapidly, dwelling completions were around 500,000 units annually.
By 2006 and 2007, with demand from EU nationals rising, completions had soared further to more than 650,000 units annually.
In 2008 dwelling completions are expected to exceed 700,000, with more than 360,000 units already completed during the first half of year, though there was a slowdown in the number of dwelling starts in 2007.
Unemployment rising rapidly
The construction industry is a key driver of the Spanish economy. The drop in construction has pushed unemployment to 12.8% in Q3 2008, from 8.3% in 2007.
Unemployment may rise to as high as 15% during 2009, the highest rate since 1997.
Gross fixed capital formation growth slowed to 5.3% in 2007, from 7% in 2005-2006, and is projected to contract by -2% in 2008, and by as much as -9.2% in 2009.
Low rental yields
Spain’s rented sector is handicapped by rent controls. Only 10% (8% in the private rented sector) of all housing units remained in the rented sector in 2004, down from 20.8% in 1981. New tenancies were partially liberalized in 1985, but leases must run for a minimum of five years, and it is difficult in law to recoup unpaid rents.
Landlords are often better off keeping their units unoccupied, because rental income is typically insufficient to compensate for the wear and tear of letting. In 2001, 14% of the total housing stock was vacant, bigger than the entire rental stock.
Gross rental yields are very low - gross returns on renting for Spain as a whole fell from 3.8% in 1Q-1998, to 1.97% in Q3-2008, according to the Banco de España.
To uplift the rental sector and utilize vacant dwellings, the government established a new public property rental agency in 2005, the State Renting Company (La Sociedad Publica de Alquiler). The company screens tenants and offers just-below market rental rates. Subsidies are also offered for companies, public bodies and individuals purchasing property for the purpose of letting. Additional assistance is also offered to poor tenants under 35 years old.
Bank of Spain wins praise
While central banks around the world are being criticized, the Spanish central bank stands out as a shining example.
The Spanish central bank has taken a tough regulatory approach. As the FT’s Gillian Tett notes:
“Earlier this decade the central bank in essence decided it disliked the idea of banks keeping vast quantities of credit assets off their balance sheets. It also quietly demanded that banks hold higher levels of reserves than international accounting laws required.
“Consequently, it furtively "gold plated" - or rewrote - European Union rules to discourage Spanish banks from creating entities such as structured investment vehicles (SIVs). And when banks such as Santander embarked on an acquisition spree in Mexico, the central bank reined them back.”
Consequently the Spanish financial sector is not being devastated by the problems afflicting other countries. Congratulations to central bank governor Miguel Fernández Ordóñez!
Spain Price History - Severe housing glut in Spain, economy slides
Os recomiendo ir al link porque no han salido los gráficos.
Severe housing glut in
Spain, economy slides
Spain’s housing market is heading south. House prices are falling, and there is a glut of newly-built houses.
House prices fell 4.27% in inflation-adjusted terms during the year to Q3 2008. The housing bubble burst in late-2007, and average house prices in Madrid, the capital, fell to €2,895 per sq. m. in Q3 2008, down 3.7% from Q4 2007, according to figures from the Bank of Spain. The price falls in 2008 are in sharp contrast to double digit price increases from 2001 to 2006.
And these are the official statistics. The statistics are widely disbelieved, even by the Minister of Housing.
“The latest overall data that I have seen for the last 12 to 14 months points towards a big fall, of at least 15%,” said Beatriz Corredor, Minister of Housing, on November 10 on Spanish TV. “Anyone who wants to buy will definitely be seeing a fall in real prices. It’s unanimous; all the statistics reflect a fall, it’s a reality that we now can’t deny.”
More Global Property Guide pages:
Spain housing market research - in-depth
Latest property news
Blogs and forums about Spain
A flurry of retractions amowed, since the Minister’s numbers flatly contradict the official statistics.
The housing glut is most severe along the coast and in areas around Madrid, and is expected to deteriorate to around 1 million homes unsold. The number of unsold newbuild homes rose to 503,000 in June 2008, 22% up on six months earlier, according to the Ministry of Housing.
The Spanish economy contracted 0.2% y-o-y to Q3 2008, the first contraction since 1993. The economy is expected to officially enter recession in the fourth quarter of 2008. The government announced an €11 billion stimulus package this November, aimed to create 300,000 jobs, on top of previously announced economic relief measures, including a €40 billion mortgage relief package, tax cuts, and credit lines for new business. GDP is likely to shrink by as much as 1% in 2009.
Interest rate hikes
Spain’s housing market is extremely vulnerable to interest rate changes, due to the use of adjustable rate mortgages. More than 80% of new mortgages have had initial rate fixations of less than 1 year since 2004 (more than 90% of new loans from 2005 to 2006).
Mortgages with fixed rates of 5 years plus have not exceeded 6% of the total since data was first collected in 2003.
The great Spanish housing boom was powered by 15 years of dramatic reductions in mortgage interest rates, from 17% in 1991, to 10%–12% (1995 to 1996), to below 3.5% (2004 – 2005) - among the lowest rates in Europe.
Mortgage rates rose quickly during 2006 to 2007. They rose above 6% in August 2008.
Higher interest rates and tighter mortgage conditions have dramatically pushed down the volume of new mortgages:
From 2005 to 2006, new mortgages averaged €13.5 billion monthly.
New mortgages have declined to around €5.2 billion monthly from August to October 2008.
Spectacular mortgage market growth
Spaniards traditionally did not finance house-purchases through mortgages. But the liberalization of the mortgage market since the 1990s changed all that.
The mortgage market grew by more than 20% annually from 2003 to 2006; although the growth slowed to 14% in 2007. The value of outstanding loans for house purchase soared 254% from €181 billion in 2000, to €642 billion in 2007.
In proportion to GDP, mortgage outstanding have grown from 14% of GDP in 1990, to 29% in 2000, and to more than 61% by end-2007.
Generous tax breaks for mortgage interest payments and capital repayments helped fuel mortgage growth.
Income tax deductions reduce effective interest rates on Spanish mortgages by 2 percentage points, according to an OECD study, and real after-tax interest rates have been negative since 1999 (the study was published in 2004). The subsidies effectively allow homebuyers to increase their total borrowings by 15% to 20%.
Housing savings schemes are also given tax breaks. Imputed rent for owner-occupied houses, and capital gains on the sale of the primary residence, are also tax-exempt.
South coast resilient?
Outside Madrid, house prices are highest on the Mediterranean Coast: Catalona, Andalucia and Valencia. These regions saw the highest house price increases during the boom, more than 200% from 1996 to 2007. In Andalucia, the region with Spain’s longest coastline, prices rose 243% over the same period.
Around 14% of the housing stock in 2001 was second homes, and the share has definitely risen since. Hundreds of thousands of foreigners, mainly from the UK, France and Germany, have joined Spanish buyers.
The average price of houses in Cataluña (the Spanish spelling), which shares its border with France, was €2,471 per sq. m. in Q3 2008. Aside from Madrid, it is the only autonomous community with house prices higher than the national average.
SPAIN
HOUSE PRICES PRICE- Q3 08
(€/ SQ. M.) PRICE CHANGE (1996 -2007) PRICE CHANGE (Q108 – Q308)
Spain 2,069 181% -1.6%
Madrid 2,895 178% -3.7%
Cataluña 2,471 214% 0.5%
Andalucia 1,781 243% -1.1%
Valencia 1,659 227% -1.5%
Galicia 1,566 149% -0.4%
Castilla-Leon 1,489 138% -2.2%
Source: Bank of Spain
House prices along the coast have shown resilience during the crash. Average house prices started falling after the first quarter of 2008, except in Cataluña where prices only started declining in Q3 08.
Massive oversupply
Oversupply of new housing units is exacerbating the problem.
From 1990 to 1998, less than 300,000 dwellings were completed annually.
By 2001 to 2003, with house prices rising rapidly, dwelling completions were around 500,000 units annually.
By 2006 and 2007, with demand from EU nationals rising, completions had soared further to more than 650,000 units annually.
In 2008 dwelling completions are expected to exceed 700,000, with more than 360,000 units already completed during the first half of year, though there was a slowdown in the number of dwelling starts in 2007.
Unemployment rising rapidly
The construction industry is a key driver of the Spanish economy. The drop in construction has pushed unemployment to 12.8% in Q3 2008, from 8.3% in 2007.
Unemployment may rise to as high as 15% during 2009, the highest rate since 1997.
Gross fixed capital formation growth slowed to 5.3% in 2007, from 7% in 2005-2006, and is projected to contract by -2% in 2008, and by as much as -9.2% in 2009.
Low rental yields
Spain’s rented sector is handicapped by rent controls. Only 10% (8% in the private rented sector) of all housing units remained in the rented sector in 2004, down from 20.8% in 1981. New tenancies were partially liberalized in 1985, but leases must run for a minimum of five years, and it is difficult in law to recoup unpaid rents.
Landlords are often better off keeping their units unoccupied, because rental income is typically insufficient to compensate for the wear and tear of letting. In 2001, 14% of the total housing stock was vacant, bigger than the entire rental stock.
Gross rental yields are very low - gross returns on renting for Spain as a whole fell from 3.8% in 1Q-1998, to 1.97% in Q3-2008, according to the Banco de España.
To uplift the rental sector and utilize vacant dwellings, the government established a new public property rental agency in 2005, the State Renting Company (La Sociedad Publica de Alquiler). The company screens tenants and offers just-below market rental rates. Subsidies are also offered for companies, public bodies and individuals purchasing property for the purpose of letting. Additional assistance is also offered to poor tenants under 35 years old.
Bank of Spain wins praise
While central banks around the world are being criticized, the Spanish central bank stands out as a shining example.
The Spanish central bank has taken a tough regulatory approach. As the FT’s Gillian Tett notes:
“Earlier this decade the central bank in essence decided it disliked the idea of banks keeping vast quantities of credit assets off their balance sheets. It also quietly demanded that banks hold higher levels of reserves than international accounting laws required.
“Consequently, it furtively "gold plated" - or rewrote - European Union rules to discourage Spanish banks from creating entities such as structured investment vehicles (SIVs). And when banks such as Santander embarked on an acquisition spree in Mexico, the central bank reined them back.”
Consequently the Spanish financial sector is not being devastated by the problems afflicting other countries. Congratulations to central bank governor Miguel Fernández Ordóñez!
Spain Price History - Severe housing glut in Spain, economy slides
Os recomiendo ir al link porque no han salido los gráficos.
