What next for the Spanish property market?

The European Commission (EC) has once again warned of the risks to the Spanish economy of a property bubble. The EC fears that Spanish properties are overvalued after almost a decade of robust price increases, and has repeatedly voiced concerns over the possibility of a ‘hard landing’ for the Spanish property sector. With interest rates rising, a property market crunch could have a large, negative impact on the rest of the Spanish economy.

EC concerns over high Spanish property prices, increasing mortgage life spans, and increasing household debt, were aired during the presentation of the EC’s autumn economic forecasts.

Referring to the Spanish property market as “possibly overvalued”, Joaquín Almunia – Economic and Monetary Affairs Commissioner – worried that, “sustaining the Spanish economy will be increasingly difficult.”

Responding to these concerns on visit to Brussels shortly afterwards, Pedro Solbes – Spain’s Finance Minister – agreed that the rising level of Spanish household debt is a cause for concern, but downplayed the risks to the Spanish economy. According to Solbes, it is unlikely that Spain’s economic growth will be hard hit by any eventual fall in Spanish property prices.

“We know that property prices are cooling, but economic growth remains higher,” said Solbes. “Spanish property prices have never fallen in nominal terms,” he added, whilst also pointing out that Spanish mortgage default rates are close to historic minimums, and that only 3 in 10 Spanish mortgages are affected by recent interest rate increases.

Solbes remarked that comparisons with the past need to allow for the fact that previous periods were characterised by high inflation and high interest rates, compared with the present situation of low inflation and low (but rising) interest rates. Current macro-economic conditions are more stable than in the past.

Solbes highlighted the fact that even the Commission does not expect a sharp fall in Spanish property prices.

Meanwhile, the OECD argues in its latest economic report that property in Spain is overvalued, and that a moderate correction in prices is likely.

Even so, the Spanish economy is not in any great danger from its real estate sector, and although Spanish property prices are “above their equilibrium”, international demand for property in Spain remains strong. “The whole world wants to buy a place in Spain,” joked Jean-philippe Cotis – chief economist of the OECD.

The OECD forecasts a “soft landing” for the Spanish property market, coupled with a slight slowdown in economic growth, from 3.7% in 2006, to 3.3% in 2007, and 3.1% in 2008, all well above the average economic growth rate for the Eurozone.

Real estate corruption damaging Spain’s international standing

The wave of real estate corruption scandals in Spain rolls on, with Andratx, in Mallorca, the latest town hall with a corruption scandal on its hands. The Spanish financial daily ‘Cinco Días’ reports that the number of official investigations into real estate corruption scandals rose by 63% to 2,016 in 2005, up from 3,279 the previous year. Corruption in the real estate sector has damaged Spain’s position in the international corruption rankings published by Transparency International. Spain has fallen from 7 to 6.8 points in the worst result for Spain since 1998. “All the public powers must react immediately,” warns Manuel Villoria – a professor at King Juan Carlos University, and member of the executive commission of Transparency International in Spain “Corruption is like a cancer, if you don’t stop it when it starts to spread, it ends up infecting all the democratic institutions.” Spain has one of the worst corruption rankings in the EU, though nothing like as bad as Portugal (6.6), Italy (4.9) and Greece (4.4).

100,000 illegal Spanish properties could be demolished

The threat of demolition hangs over 100,000 Spanish properties built without planning permission, or with an invalid building license, according to a recent article in the Spanish daily ‘El Mundo’. Calls for a tougher line to be taken with illegally built homes in Spain are increasing, and Antonio Vercher – the head official in charge of real estate and environmental investigations – is quoted as saying that, “we need to rethink this issue, and find effective new solutions.”

This topic is discussed in the Spanish Property Insight Forum: Read

“Zero growth” forecast for Spanish property prices

According to Miguel Sebastián – director of the economic affairs in the office of the President – the rising spiral of Spanish property prices has burnt out, and Spanish property inflation will soon hit zero.

Speaking at the presentation of a new report entitled ‘Immigration and the Spanish Economy: 1996-2006’, Sebastián also claims that Spanish property inflation, which seems to be falling gradually, is developing “reasonably well”. He pointed out that immigrants are an important new source of demand for housing in Spain, and already buy 25% of all properties sold in Spain, and take out 20% of all new mortgages. Sebastián expects the Spanish property sector to remain in good health for many years to come.

© Mark Stucklin of Spanish Property Insight – Everything you need to know about Spanish property