Where Have
All The Spanish property Speculators Gone?
15 May 2007
Many estate
agents in Southern Spain are facing difficult times because they can
no longer sell to one customer two or three properties. In 2003 &
2004 it was normal practice for most real estate salespeople to sell
off-plan properties with the brilliant idea of reselling before
completion and realising a tidy profit. This speculative practice
fuelled the property boom and although it worked for a while
ultimately it had to come to an end, as there are only so many
genuine buyers. All speculation depends upon a real customer at the
end of the chain.
As the
practice gathered pace and then peaked, suddenly there were more
properties than buyers, the result? Many people are now left with
having to complete on buying off-plan properties they just never
needed in the first place.
The fact is
many people came to Spain to buy one dream property and got sold two
or three.
Market forces
have a way of levelling these things out and these excess properties
are now being offered for sale, not at a huge profit, but at prices
of two and three years ago, some even at a loss.
Common sense
tells us that property prices just cannot keep rising at 15% and 20%
year on year. This period of multiple sales led to the “illusion”
that the demand was greater than was in fact the case. The
underlying demand for property in Southern Spain is in truth, very
strong and has been for the past five years.
Is there a
Spanish property price crash about to happen?
All the long term indicators are strong and tell us underlying
demand is set to continue. The speculators just added short term
“froth” for a couple of years and now this “froth” is going flat,
but does this mean the underlying demand is dying?
The property
market in Southern Spain can be divided into different sectors and
just like the UK different sectors and different geographical areas
perform differently at different times. The demand for property in
southern Spain comes from, not only the UK, but also from northern
Spain and from other northern European countries. This broader base
is an indication of strength because if one particular area drops
off then other areas can pick up.
The
speculators and the salespeople who profited from selling
“incredible investments” have gone to Bulgaria, Eastern Europe and
even South America!
The strength
in the Spanish market is due to the fact that people buy in Spain
because they want something for the future, they are buying for a
real purpose not just to speculate and make a quick buck. There are
many buyers taking the longer term view because they want eventually
to retire here.
Just look at
the numbers of people leaving the UK – check out the BBC page
http://news.bbc.co.uk/2/hi/uk_news/5237236.stm
And also
http://news.bbc.co.uk/2/hi/uk_news/6210358.stm
This trend is
strong and will continue. It is the same story from other European
countries and even from Northern Spain. The fact is as people reach
Middle age and start thinking about retirement it makes a lot of
sense to move to a warmer climate. When you add in all the other
political reasons and the proximity of Southern Spain the logical
conclusion is more and more people will move to Spain during the
next 10 years. The period of crazy speculation is over and where
once people were buying two and three properties they now buy just
one.
If we do the
maths this means that even if the sales drops by half or two thirds
it does not necessarily mean there are less buyers, just that each
single buyer is only buying one property. Who suffers? The
speculators and developers who have gone out and bought huge plots
of land thinking the speculation would never end. Today because real
estate companies only can sell one property to one customer their
sales graphs look very sad. Of course for those quoted on the stock
market having sad looking sales graphs is disastrous because the
stock market likes vertical sales graphs, going upwards not
downwards. It is hardly surprising to see quoted property companies
suffering a fall in their share prices as recently reported in the
press.
The other
headache for the developers is the discovery that in their “haste to
make hay whilst the sun shines” they bent a few rules in acquiring
good plots of land for development and cases are coming to light
that involves developers and council officials and certain
“benefits” provided and linked to planning permission. The loss of
the speculators and the clean up campaigns by the authorities has
resulted in very difficult times for some developers. Astroc, quoted
in Madrid has seen their share price tumble by 60%!
The Spanish
government has also recognised the effect of this speculation and
corruption and has recently brought in new legislation designed to
help reduce the froth in the market, unfortunately like all
governments they are reactive rather than proactive and have decided
to act once the party is over, but better late then never. Spanish
Prime Minister, José Luis Rodríguez Zapatero, says that the new “Ley
de Suelo” will fight against real estate corruption. He said
“the new law would mean that
those who benefit from decisions made in local town halls could be
identified, and the spiralling prices controlled”
So if the
speculators, and the salespeople who helped create the froth, have
had their day where does that leave us today?
Southern
Spain is maturing as a market and we should consider the resale
market. We have discussed how the new off-plan market has peaked and
dropped off due to the speculators and corruption but what about
re-sales?
Some
interesting figures from the Spanish Housing Ministry:
New
Homes Sales
2004: 14,308
2005: 15,800
2006: 13,724
Second Home
sales / resale's
2004: 22,791
2005: 22,765
2006: 25,328
We can
clearly see that re-sales are continuing to grow but new sales
peaked in 2005. The continued growth in re-sales is a good
indication of a “real and robust market” unlike new off-plan sales,
which due to speculators provide a distorted view of the market.
In general
the economy in Europe has performed well in the past few years and
we are now seeing inflation pushing slightly upwards which has
caused the Central Banks to increase interest rates.
Given that
the speculators have gone and interest rates have risen, it is
hardly surprising to see a fall in demand for Spanish property. It
is in fact to be expected, the only area of dispute here is the
degree, is it a “crash” or removal of the “froth”?
The recent
interest rate increases are designed to slow the economy and they
are beginning to have exactly that effect. The result of all this is
that there are less pure speculators in the market but there is
still a strong demand, prices in some areas have dropped but in
other areas they have gone up. The market is slower but not
crashing. These are normal market conditions and normal cycles, no
market keeps growing at 15% to 25% every year,
there has to be a slowdown and in Southern Spain we have a slowdown
with prices rising only at 5%.
I think the
British press are always looking for bad news and pick up on any
indications that suggest bad news may be coming in the hope of being
the first to report it. I think for Spain they are wide off the mark,
there is a slowdown and this is normal and healthy for the market.
There will not be a crash just an opportunity to buy at less
inflated prices and these slowdowns do, when we look back, actually
represent a good time to buy.
Article by John Murphy MD
Overseas Living Group
