Nothing positive to write about Spain

Some readers have e-mailed asking if there is a pecking order of "troubled" global property markets and wonder where Ireland, the United Kingdom and the UAE would feature on such a league table.

They should not worry – those locations' problems are short-term and relatively minor compared to the long-term structural issues facing Spain.

The background is this: after a decade of strong economic and particularly real estate growth Spain's GDP contracted four per cent in 2009, according to the IMF, and another 0.8 per cent fall predicted for 2010.

A switchback of inflation and deflation in the past two years has been exacerbated by the country's 100 per cent reliance on the import of fossil fuels. By the middle of 2009 the country had shed 1.2 million jobs in just a year and unemployment (now running at more than four million for the first time in the country's history) has hovered around 15 per cent since late 2008.

The role of property in this crisis is well known.

Official Spanish house price indices are extraordinarily unreliable (indeed, openly mocked by many property professionals) but best guesses put prices down between 20 per cent and 35 per cent since the 2007 high – itself about 200 per cent above its mid-1990s level, so still substantially higher than before, to the comfort of long-term owner occupiers.

But the holiday home sector, dominated by foreign buyers, is far worse.

Some figures show around 1.05 million empty homes (completed or in the later stages of construction) now exist in Spain and some 40 per cent of those are in the Costas, aimed at foreign holiday home buyers or investors.

These are complemented by many second hand homes in these areas which are also on sale; their owners become cash-strapped and (in the case of older Britons) find the cost of living soaring because their income from the UK loses value thanks to the poor Sterling-Euro exchange rate.

Now the over-supply of homes on the market, especially holiday homes, is likely to get worse.

Banks forecast that 100,000 to 150,000 repossessions will reach court stage this year – although many of these foreclosures began in 2008 and have taken two years to reach fruition.

With few vulture funds and individual "distress buyers" (yes, even they have dried up, and auctions are reporting poor numbers of attendees) banks are likely to repossess the properties at the financial industry "norm" of 50 per cent of their valuation.

As the volume of repossessions here constitutes some 20 per cent of the whole real estate resales market in Spain, this one act effectively creates a new and lower average price for housing.

Mark Stucklin, one of the most authoritative observers of Spains residential market, predicts the banks might end up offering these homes for sale at write-off values. "The danger is that an avalanche of these properties dumped on the market at write off values will send the market into a spin, with prices falling another 20 per cent to 30 per cent. The danger, or perhaps the opportunity, depending on how you look at it" he says.

As Stucklin says, one person's property loss is (whether we like it or not) another person's property opportunity – that phrase normally suggests a ripe chance for investors, but Spain is hardly likely to appreciate in the short- and mid-term. The Economist magazine – admittedly using the same derided data from Spain's housing authorities – says the country's property market is still over-valued by a whopping 55 per cent. There are many caveats on the figure, which is calculated by looking at the ratio of capital values to rental values, but if this turns out to be even remotely accurate and is a forecast of what will happen, do not expect investors to pile in yet.

It presents a bleak picture for a national housing market and economy that was being lauded around the world just three years ago. The matter is complicated by the country's unusual characteristics – high levels of overseas ownership (unique in Europe), extreme sensitivity to exchange rates, and its above-average levels of construction firms in administration and its GDP's reliance on the building sector. The scale of residential over-supply may now take a decade to clear.


- Graham Norwood is a Property Correspondent for The Observer

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