Property market problems in Marbella

The Spanish daily ‘El Pais’ reports that political uncertainty and corruption scandals have pushed Marbella’s property market to its lowest point in 5 years. The paper quotes Emilio Langle – residential property director of real estate consultants Aguirre Newman – as saying that “This Andalusian city’s property market is in recession: new developments are completed with 35% of units unsold, and investment potential is practially zero.” He goes on to reveal that the average time to sell for new developments has risen to 32 months, up by 3 months compared to a year ago.

Foreign press pessimistic over Spain’s economic prospects and property market
Foreign Dailies such as The FT, The Guardian, and Le Figaro (France) have all recently published articles raising doubts about the sustainability of Spain’s economic growth, and the economic dangers of Spain’s property bubble bursting.

In general the articles argue that, impressive as Spain’s economic growth has been over the last decade or so (Spain now generates 12% of the Euro-zone’s GDP, and was responsible for 32% of the Euro-zone’s GDP growth between 2000 and 2005 – says The Guardian), it has been driven largely by a real estate boom that has covered up serious structural problems in the economy, for instance labour market rigidities, rapidly rising labour costs and low productivity gains.

Le Figaro quotes Ricardo Verges of Spain’s association of architects (see below) as saying that “the Spanish real estate market is growing at a frenetic rate, its absolute madness,” and that “This growth is not sustainable. Spanish household mortgage debt has now risen to 600 billion Euros, which means we have hardly paid for anything we have build, just the interest.” Le Figaro also notes a recent study of 19 EU countries by the organisation Euroconstruct finding that 28.4% of all new construction in the EU has taken place in Spain.

Rapidly increasing property prices (150% up since 1998 despite the stock of properties doubling in the same period – according to The FT) can partly be blamed on Spain’s membership of the Euro-zone, where low interest rates intended to resuscitate Germany’s economy have not suited Spain’s overheating economy. Low interest rates mean cheap money and easy credit, which in Spain’s case has fanned the flames of a real estate boom. As a member of the Euro-zone Spain has been unable to raise interest rates to cool the boom in a timely fashion, and can no longer devalue its currency – formerly one of Spain’s favourite ways of increasing its competitiveness.

Some of the articles conclude that Spain’s real estate bubble will burst sooner or later, with painful economic consequences. Spain’s real estate sector presently generates 18% of Spain’s GDP and 12% of it’s employment, the equivalent of 2.5 million jobs.

Operation Malaya – the police and judicial operation against illegal building and corruption centred on Marbella in the Andalusian province of Malaga – has entered a second phase with the arrest on 27 June of 30 more individuals, including local politicians, officials, and property developers. Most of the arrests have been made on suspicion of bribery and money laundering. Property developers arrested to date include Fidel San Roman of the developer Cantizal, Emilio Rodriguez of Construcciones Salamanca, and Francisco Garcia of Aifos.

Meanwhile the Spanish authorities continue to stop illegal building projects in the province of Malaga. The largest intervention to date, authorised in June by magistrates in Coin, has stopped work on some 2,000 new properties on various developments in the municipality of Tolox, located inland from Marbella.

Despite a softer market, cooling prices, and lengthening sales times, Spain is still building more properties than the UK, France and Germany combined.

The latest figures released by Spain’s association of architects (el Consejo Superior de los Colegios de Arquitectos de España) show 211,556 housing starts in Spain in the first quarter of the 2006, up by 1% on the same period last year. However, over a 12-month period to the end of March 2006, housing starts were up by 4.1% compared to the same period last year, reaching 820,107 - the largest number of housing starts ever to take place in Spain during a 12-month period. The previous 12-month record was achieved in 2005, with a total of 812,294 housing starts from January to December.

Commenting on these figures, Ricardo Vergés – the association’s chief economist – described this level of housings starts as “unsustainable”, and pointed out the risks to the Spanish economy.

By region, Andalusia continues to build the greatest number of new homes, with 45,300 housing starts in the first quarter of the year (down 6% on 2005), followed by Catalonia (31,975, up 1.8%), and the Valencian Region (26,554, down 4.1%).

Extremadura experienced the greatest increases in housing starts in the first quarter of the year, up by 33.5% to 4,599 starts, followed by La Rioja, up by 27.9 to 2,238, and Galicia, up by 22.6% to 13,890.

Excluding Ceuta and Mellia, the greatest percentage falls in housing starts by region were in Navarra, down by 36% to 2,081, Asturias, down 30.5% to 3,631, and Cantabria, down 12.9% to 2,968.

Meanwhile, a new report from Euroconstruct reveals that Spain accounted for 28.4% of all new European housing starts in 2005, whilst only having 9.7% of the EU’s population. The report forecasts that the growth in residential construction activity in Spain will gradually decline, reaching average European levels some time after 2008. One of the reasons for this is the withdrawal of European structural funds, which will now go to the 10 new EU member states.

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