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May 18, 2017

Spanish housing market recovery continues

by Lalaine C. Delmendo

Spain houses for saleSpanish house prices increased 2.67% during the year to end-Q1 2017 (0.38% inflation-adjusted) to €1,385 per square metre (sq. m), the fifth consecutive quarter of y-o-y house price rises, according to TINSA. Quarter-on-quarter, house prices rose by 3.2% (4.1% inflation-adjusted) during the latest quarter.

Spain´s housing market finally returned to growth in Q1 2016. Spanish house prices had fallen by a total of 41.9% (46.8% inflation-adjusted) from Q4 2007 to Q3 2015, based on figures from TINSA. There were 31 consecutive quarters of y-o-y declines:

  • In 2008, Spanish house prices fell 8.75% (-10.05% inflation-adjusted)
  • In 2009, house prices fell 6.57% (-7.23% inflation-adjusted)
  • In 2010, house prices fell 3.85% (-6.67% inflation-adjusted)
  • In 2011, house prices fell 8.17% (-10.28% inflation-adjusted)
  • In 2012, house prices fell 11.34% (-13.82% inflation-adjusted)
  • In 2013, house prices fell 9.19% (-9.44% inflation-adjusted)
  • In 2014, house prices fell 2.96% (-1.96% inflation-adjusted)
  • In 2015, house prices fell 1.71% (-1.71% inflation-adjusted)
  • In 2016, house prices increased slightly by 1.67% (0.1% inflation-adjusted)

Demand is now rising strongly. In 2016, the total number of home sales in Spain increased 14% to 457,689 units from the previous year, according to the Instituto Nacional de Estadistica (INE). This rise in transactions was mainly driven by foreigners buying homes on the coast and in cities like Barcelona and on the Costa del Sol, one of the country’s most popular areas with overseas purchasers. Most foreign homebuyers are Britons, French, Germans, Belgians, Italians and Swedes.

Foreclosures fell by 31.3% to 41,129 dwellings in 2016 from a year earlier, based on figures from the INE. Foreclosures dropped 33.6% for new dwellings and by 30.9% for existing dwellings.

The outlook for Spain’s housing market is now upbeat, with house sales expected to rise by between 10% and 15% to reach about 520,000 to 545,000 transactions this year, according to TINSA.

“We believe that a growing economy, low financing costs, good potential for rental returns and capital appreciation will continue to drive sales throughout 2017 and beyond,” said Lucas Fox International Properties.

Nationwide house prices are also projected to increase by about 2% in 2017. More specifically, house prices are expected to rise by 7% in Barcelona and by 4% in Madrid, according to housing market analyst Borja Mateo.

“The price recovery now taking place in Madrid, Barcelona, and certain tourist zones of the coast will extend to the suburbs and other parts of the country,” forecasts Beatriz Toribio of real estate portal Fotocasa.

In the first quarter of 2017, the economy advanced 0.8% from the previous quarter, the same as in the same period last year, making it as one of the fastest-growing economies in the European Union. On an annual basis, Spain’s GDP expanded by 3% in Q1 2017. The economy is expected to grow by 2.8% this year, after growth of 3.2% in 2015 and 2016, and 1.4% in 2014, and contractions of 1.7% in 2013, 2.6% in 2012 and 1% in 2011, according to the Bank of Spain.

Local house price variations

Spain land prices

Most regions showed remarkable improvements during the year to Q1 2017.

During the year to Q1 2017:

  • In capitals and big cities, house prices rose by 5.5% to an average of €1,409 per sq. m, according to TINSA.
  • In the Balearic and Canary Islands, house prices rose by 7% to an average of €1,439 per sq. m.
  • On the Mediterranean Coast, house prices increased 1.9% to an average of €1,413 per sq. m.
  • In metropolitan areas, house prices rose dropped slightly by 0.5% to an average of €1,270 per sq. m.
  • In the rest of municipalities, house prices dropped slightly by 0.6% to an average of €1,377 per sq. m.

Urban land prices rising

Spain house price index areas

The average price of urban land transactions in Spain rose by 13% to €171.70 per sq. m in 2016 from the previous year, according to the INE.

During 2016:

  • In Madrid, average urban land price rose by 16.1% to €339 per sq. m.
  • In Andalucialand prices rose by 15.7% to an average of €167.1 per sq. m.
  • In Cataluña, the country’s second largest region, land prices increased 5.7% to an average of €189.5 per sq. m.
  • In Castile-La Mancha, average land price rose by 5.4% to EUR96.7 per sq. m.
  • In Galicia, land prices declined 21.3% to an average of €66.3 per sq. m.
  • In Castilla y Leon, average land price fell by 9.8% to €54 per sq. m.
  • In Canary Islands, average land price fell by 9.7% to €167.3 per sq. m.
  • In Valencian Community, average land price dropped 6.5% to €146.1 per sq. m.

The number of land transactions increased 10.7% y-o-y to 17,396 units in 2016 while the value of land transactions soared 15.1% to almost €2.98 billion over the same period, according to the INE.

Housing cycle

Spain house price index 2007

From 1996 to 2007, Spain’s national average house price rose by 197% (117% inflation-adjusted), one of Europe’s highest house price increases. The price of coastal properties surged 250% (155% inflation-adjusted) from 1996 to 2007, as hundreds of thousands of foreigners, mainly from the UK, France and Germany, bought property.

In Madrid and Barcelona house prices rose 188% (109% inflation-adjusted) from 1996 to 2007, while prices in other inner provinces rose by 175% (101% inflation-adjusted).

The boom ended abruptly in 2008. The housing slump battered the Spanish economy, and brought spiraling unemployment. Developers were left with blocks of unsold properties and massive debts. Uncertainty engulfed the market.

Despite the price rises of 2016 nationwide house prices are still 39.4% below the peak levels seen before the global crisis.

Transactions rising again

Spain residential property transactions

In 2016, home sales in Spain increased 14% to 457,689 units from the previous year, according to the Instituto Nacional de Estadistica (INE), mainly due to surging second-hand sales.

The number of transactions for second-hand houses rose 16.5% to 410,664 units in 2016 from a year earlier, according to the INE. On the other hand, transactions of newly built houses fell by 4.2% y-o-y to 47,025 units.

During 2016, Cataluña recorded the biggest jump in sales of 23%, followed by Balears (22.3%), Madrid (17.2%), Asturias (16.9%), Valencian Community (14%), Extremadura (13.9%), Castile-La Mancha (13.9%), Cantabria (12.8%), Pais Vasco (12.5%), and Canarias (12.1%). Strong sales increases were also seen in Castilla y Leon (11.9%), Andalucia (9%), Ceuta y Melilla (7.4%), Murcia (6.8%), Navarra (6.7%) and Galicia (6.4%). There were also modest sales rises in Rioja (4.3%) and Aragon (3.4%).

“Regarding re-sale properties, we forecast a continued upward swing, especially now that the uncertain political situation which prevailed during 2016 has come to an end,” said Juan Luis Herrero of Lucas Fox. “The return of mortgage credit and low interest rates will continue to fuel this trend.”

Foreign demand continues to rise

Foreign investors started to return to the Spanish property market in 2014. In 2016, foreign homebuyers bought about 53,500 homes in Spain, up 13.8% from a year earlier, based on figures released by Property Registrars, representing a record of 13.25% of all home sales in Spain, up from 13.18% in 2015, 13.01% in 2014 and just 4.24% in 2009.

Britons remain the number one foreign homebuyers, accounting for about 19% of all home purchases by foreigners in 2016, followed by the French (8.05%), Germans (7.69%), Swedes (6.72%), Belgians (6.03%), Italians (5.41%) and Romanian buyers (4.53%). Chinese buyers are also increasing, with around 4.14% of total transactions.

The Golden Visa scheme, fully applicable since 30th September 2013, has resulted in increased interest not only from the Middle East but also from Asia and Russia. Under this system, any non-EU national bringing more than €500,000 (USD689,700) to invest is automatically granted a Spanish residency permit.In 2015, the laws were amended to make it even easier for applicants to obtain the Golden visa in Spain.

During the first three years, the Golden Visa scheme attracted 2,236 applicants, mostly Chinese and Russians. But Spain received a mere €2.16 million in foreign investment as a result, with 72% invested in Spanish property, according to Spanish newspaper El Pais.

Chinese and Russian investors represent about 60% of all money invested in the said scheme. Since its introduction, 714 Chinese nationals and 685 Russian investors were granted visas under the Golden Visa scheme.

The Balearic Islands are especially attractive to foreigners with about 33% of total demand coming from foreigners in 2016, mainly due to its white-sand beaches and sunny Mediterranean landscape. It was followed by Canary Islands (30.49%), Valencian Community (26.66%), Murcia (18.57%), and Andalucia (15.06%).

Spain’s ‘bad bank’ SAREB continues to post losses, despite increased property sales

Following the crash, in August 2012 SAREB - Spain’s “bad bank” - (Sociedad de Gestión de Activos procedentes de la Reestructuración Bancaria) was founded to separate problematic assets from the balance sheets of weak credit institutions.  About €55 billion (USD 75.84 billion) was transferred to it from nationalized Spanish financial institutions: BFA-Bankia, Catalunya Banc, NGC Banco-Banco Gallego and Banco de Valencia; and from banks that required medium-term financial aid.

Over the past five years, SAREB has lost about €3.2 billion, aside from underlying capital losses of a further €3.389 billion, valued just on 50% of its portfolio. “We bought at a high price,” said SAREB spokesperson. “Today our assets are worth three billion less than we paid for them.”

SAREB lost a huge €663 million in 2016, six times more than the previous year – despite a sharp increase in its property sales, which surged 25% to 14,000 units. Most of its property sales were in Madrid, Andalucía, Cataluña and Valencian Community.

Spanish interest rates are amazingly low

Spain interest rates

Following post-crisis European Central Bank (ECB) key rate reductions, the average mortgage rates in Spain dropped to 2.61% in December 2012, to 2.11% in December 2013, to 1.89% in December 2014, to 1.53% in December 2015 and to 1.29% in December 2016. In February 2017, the average mortgage rate in Spain stood at 1.28%, according to the European Central Bank (ECB).

In February 2017:

  • The interest rate for housing loans with initial rate fixation (IRF) of up to 1 year stood at 2.59%, down from 2.85% a year earlier.
  • The interest rate for housing loans with IRF between 1 and 5 years was 5.18%, down from 5.62% a year earlier.
  • The interest rate for loans with IRF of over 5 years was 1.27%, down from 1.46% a year earlier.

Spain’s housing market has traditionally been extremely vulnerable to interest rate changes, due to the use of adjustable rate mortgages. Before 2004 more than 80% of new mortgages had initial rate fixations (IRF) of less than 1 year. The share of adjustable rate mortgages increased further to more than 90% of new loans from 2005 to 2006.

However, there has been a continuous decline in the share of adjustable rate mortgages in recent years. In 2015 only 62% of all new mortgage loans were adjustable rate. In 2016, there was a further shift in favor of fixed rate mortgages. Coinciding with the 12-month Euribor’s entry into negative territory, fixed rate mortgages represented more than half of all new loans contracted last year, according to the Spanish Mortgage Association.

New mortgages are rising

Mortgages totals are still falling because of the large downturn in new grants during the crisis. In 2016, the Spanish mortgage market contracted to about 48.26% of GDP, down from 51.51% of GDP in 2015 and 61.54% in 2011, according to the ECB. 

Spain housing loans

However in 2016, new home mortgages increased 14.1% y-o-y to 281,484–still far, of course, from the average of 1.13 million new home mortgages granted every year from 2003 to 2008.

Rents rising, yields recovering

Spain foreclosures

In Q1 2017, average apartment rents in Spain rose by 5.9% y-o-y to €7.93 per sq. m., according the real estate portal Fotocasa.

Rent increases were seen in almost all regions. Cataluña saw the highest annual increase in rents, up by 5.4% in Q1 2017 from the previous quarter.

“Rental prices are rising significantly because demand is much higher than supply, above all, in those areas with the largest volumes of economic, tourist and demographic activity,” said Beatriz Toribio, Head of Research at Fotocasa.

Barcelona had the highest rental price of €15.15 per sq. m. per month in Q1 2017, followed by Eivissa (€14.60 per sq. m per month), Sant Cugatdel Vallès (€13.41 per sq. m per month), Sitges (€12.85 per sq. m per month) and Castelldefels (€12.85 per sq. m per month).

Despite improvements in recent years, rents were still 21.7% below the peak levels. The biggest declines were in Aragón (-38.7%), Castilla-La Mancha (-34.1%), and Cantabria (-31.3%).

“Month after month, in regions such as Cataluña, Madrid and the Balearic Islands, we are seeing how the distance between the peak prices recorded in 2007 and 2008 is decreasing, and in some cities in those areas, the price per square metre has now reached the pre-crisis maximum, such as in the case of Barcelona”, Toribio added.

Gross rental yields on property in Spain continue to recover, according to Global Property Guide research conducted in July 2016.  In some places in Spain, but only for the smallest sized apartments, buying an apartment is now attractive from a yields perspective, which is a completely new situation for Spain.

The gross rental yield for apartments in Barcelona ranges from 3.90% to 5.00%, and in the centre of Madrid, rental yields are similar, ranging from 3.90% to 4.70%. In Madrid-suburbs, rental yields range from 4.15% to 5.25%.All these yields figures are better than last year, which was better than the previous year. Spain is once again beginning to look a possible investment destination.

Housing glut should be cleared by 2018

The oversupply of homes reached its peak in 2010, when the surplus stock amounted to 931,615 homes, according to the Institute of Business Practices (el Instituto de Práctica Empresarial or IPE). Partly due to strong demand, the surplus of homes fell by 41% from 662,761 homes in 2014 to just 389,000 homes in 2015.

Currently, the housing glut remains between 350,000 to 400,000 homes.

Spain residential construction

“It is clear that demand is up, mortgage lending is growing, and the price of property that people actually want to buy is stable or rising,” said Mark Stücklin of Spanish Property Insight. “However, there is still a vast glut of homes built in the wrong place for which there is little demand.”

Almería is the province with the highest level of excess housing stock, with 38.9%, followed by Cuenca (37.1%), Castellón (36.1%), Toledo (34.7%) and Murcia (32.7%), according to TINSA.

In contrast, Álava is the province with the smallest proportion of unoccupied homes, with only 10.3%, followed by Guipúzcoa (15.2%) and Navarra (17.6%).

The degree of overbuilding can be guessed at by looking at the number of housing starts from the National Statistics Institute (INE):

  • From 1990 to 1996, an average of 240,000 dwellings were started annually.
  • Between 1999 and 2002, with house prices rising rapidly, dwelling starts exceeded 500,000 units annually, rising to 650,000 annually 2003 – 2004
  • In 2006, dwelling starts exceeded 700,000
  • In 2007 commodity price rises brought rising costs – and starts slowed to 615,976.
  • A drastic decline followed. There were just 328,500 dwelling starts in 2008, and 159,286 in 2009. In 2010, there were 123,616 dwelling starts.
  •  In 2011 starts declined to only 86,252, and in 2012 to 50,000.
  • Dwelling completions followed a similar path. Despite the massive oversupply, dwelling completions exceeded 630,000 in 2008, most units having been started before the crisis. In 2009, dwelling completions dropped to 424,000. In 2010, completed dwellings stood at 276,883. A further decline in 2011 with only 179,351 dwellings completed. Only 133,415 dwellings were completed in 2012.

Tinsa believes the housing glut will be cleared by the first half of 2018 and new constructions will pick up in areas with high absorption rates to avoid shortages. These include Madrid, Barcelona, Malaga, Granada, Girona, Oviedo, Santander, Vigo, Pontevedra, San Sebastian, Gijon and Aviles.

Economic fundamentals improving

Spain gdp inflation

Spain’s economy started to recover in 2014, with GDP expanding by 1.4%, according to the International Monetary Fund (IMF). In January 23, 2014, Spain became the second euro zone country to exit its international bailout program, after Ireland. The economy grew by a healthy 3.2% in both 2015 and 2016, mainly due to an increase in consumption on the back of falling unemployment, strong exports and a thriving tourism sector.

In the first quarter of 2017, the economy advanced 0.8% from the previous quarter, the same as in the same period last year, making it as one of the fastest-growing economy in the European Union. It was Spain’s 14th consecutive quarter of growth since it emerged from a grueling five-year financial crisis in late 2013. In an annual basis, Spain’s GDP expanded by 3% in Q1 2017.

It has been a long, hard slog.  Recession has been Spain’s normal condition for years.  The economy shrank by 1.7% in 2013, according to the IMF, by 2.6% in 2012 and by 1% in 2011. In 2010, the economy grew by a meager 0.02%, after a contraction of 3.6% in 2009.

Bank of Spain expects the Spanish economy to expand by 2.8% this year, up from its previous estimate of 2.5% growth.

Spain’s economy was fuelled by property during the boom decade from 1997 to 2007. At the height of the housing boom in 2007, housing investment was no less than 7.5% of Spain’s GDP, significantly above the OECD average. The construction industry became a key employer of low-skilled workers. The increase in construction activity helped pull unemployment down from 24% in 1994, to 8.3% in 2007.

Spain unemployment

With the situation reversed, Spanish unemployment now stands at 18.75% in Q1 2017, down from 21% in Q1 2016, 23.8% in Q1 2015 and 25.9% in Q1 2014, according to the INE. Despite this, Spain’s unemployment is still the second highest in the OECD, next to Greece. The country’s overall unemployment rate is expected to be 17.7% at the end of 2016 and to fall further to 16.6% in 2018, according to the IMF.

“The figures have not improved miraculously: thanks to reforms, the economy is turning the corner away from the crisis; unemployment, while still very high, has fallen. And we expect it to continue falling,” said IMF managing director Christine Lagarde.

In March 2017, consumer prices increased 2.1% from a year earlier, down from 3% in the previous month but up from an annual decline of 0.8% in March 2016, according to INE. Annual inflation is expected at 1.9% this year, from -0.3% in 2016, -0.6% in 2015, and -0.2% in 2014, according to the European Commission.

Spain narrowed its budget deficit to 4.7% of GDP in 2016, down from 5.1% in 2015, 5.9% in 2014 and 7% in 2013. The government aims to reduce the deficit further to 3.1% of GDP this year to meet the target set by the European Union.

Spain’s gross public debt stood at about 99.7% of GDP in 2016, from 99.8% of GDP in 2015 and 99.3% of GDP in 2014. It is expected to increase slightly to 100% of GDP this year, according to the European Commission.






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