Spain’s house price falls decelerating, near bottom?
Last Updated: March 24, 2014
Spanish house prices registered a year-on-year decline of 4.2% in Q4 2013, slight improvement from a fall of 4.49% the previous quarter, according to Banco de España (BDE). It has now accrued a decline of 30.2% from the maximum values reached in 2007, before the crisis, and has accumulated 21 consecutive quarters of y-o-y declines. The decline registered in 2013 is lower than those experienced in the fourth quarter of 2012 (-10.02%), 2011 (-6.78%) and 2009 (6.25%), but exceeds those of 2010 (-3.53%) and 2008 (-3.21%).
According to the latest Tinsa IMIE Index, prices have declined 7.9% y-o-y in February 2014, an improvement from the same period last year registering a year-on-year decline of 11.6%.
Since December 2007, the cumulative decline in prices has reached:
- 48.6% on the Mediterranean coast
- 43.7% in the capitals and major cities
- 43.1% in the metropolitan areas
- 34.8% in the rest of the municipalities
- 32.8% in the Balearic and Canary Islands
Prices have continued to decline and properties have gotten cheaper since the bursting of the housing bubble, reversing some of the large increases of the real estate boom years, but not enough to revive the housing market. There is reason for optimism, however, as the Q4 2013 figures from Bank of Spain represent the smallest decline since end of 2010.
The outlook for the Spanish property market is looking more positive for 2014 with house prices rising in three regions. Madrid, Balearic and Canary Islands report year-on-year property price rises in Q4 2013 of 1.82%, 3.23% and 0.23%, respectively, according to the Spanish Ministry of Development.
However, house prices have declined overall with other regions exhibiting price declines y-o-y in Q4 2013:
- La Rioja recorded the steepest decline of 15.2%
- House prices in Cantabria, Castilla-La Mancha, and Aragon recorded double-digit declines of 11.95%, 11.72% and 11.25%, respectively
- In Castille and Leon, Cataluña, and Asturias, house prices dropped by 9.54%, 7.73% and 7.58%, respectively
- Andalucia registered a decline of 6.31%, followed by Murcia with 4.73% decline and Extremadura with 4.05% decline
- The three lowest declines were recorded at the Valencian Community (1.73%), Navarra (1.43%) and Galicia (0.9%).
According to Kyero news, the ‘XVIII Housing Market Report’ prepared by Tecnocasa and the PompeuFabra University (UPF), found that the number of investor buyers is growing steadily. “In fact, in the second half of 2013, the number of buyers who did so as an investment increased by 7.94 percentage points compared with the first half of the year, accounting for 24.32% of all the purchases made, and reaching 32.04% in the city of Barcelona (9.9 points more than six months previously)”, said Alan of Kyero.
In Q4 2013, the average house price stood at EUR 1,466.9 (USD 2,023.44) per square meter.
Land prices are also falling. The average land price in Spain dropped 21.09% to EUR 147.9 (USD 204.1) per sq. m. year-on-year in Q4 2013. The highest land price was registered in Madrid at EUR 270.7 (USD 373.4) per sq. m., followed by the Balearics at EUR 268.3 (USD 370.09) per sq. m. The cheapest land was in Castille and Leon, at EUR 59.9 (USD 82.63) per sq. m.
Latest government figures suggest that property demand from foreign buyers is helping to keep the Spanish property market afloat. Data from the Spanish Ministry of Development shows foreign demand to represent 1 in 6 property sales.
The total number of properties sold dropped 17.4% to 300,349 units in 2013 from the previous year. Of which, about 81.2% were in the second-hand property market while 18.8% were new housing.
The Spanish market is yet to hit bottom, agents and market experts said, but the rate of decline seems to be moderating.
“I think that we are coasting toward the bottom — the economy and the housing market,” said Mark Stücklin, a real estate expert and consultant in Barcelona, in a report by Spanish Property Insight. “There’s been five years of declining prices, and the last two years have been double-digit declining prices and acute pain and distress.” But he added that the rates of devaluation were easing. “In 2014, average price drops will get smaller and smaller, and I think we’ll bottom out in prices in 2015.”
In 2011, the economy recorded a meager growth of 0.5%, after experiencing annual declines of 3.8% in 2009 and 0.2% in 2010. In 2012, the economy slid to recession again and contracted 1.6%, according to IMF. GDP shrank 1.2% in 2013 from a year earlier, but grew 0.3% q-o-q in Q4 2013. This is the second quarter of expansion after over two years of recession and the fastest growth seen in six years. The Spanish government expects the economy to grow by about 0.7 % in 2014.
From boom to gloom
From 1996 to 2007, Spain’s national average house price rose by 197% (117% in real terms), one of Europe’s highest house price increases.
Madrid and Barcelona aside, house prices are highest on the Mediterranean: in Catalona, Andalucia and Valencia. The price of coastal properties surged 250% (155% in real terms) from 1996 to 2007, on average, as hundreds of thousands of foreigners, mainly from the UK, France and Germany, bought property.
On the other hand, the average price of properties in Spain’s two main cities, Madrid and Barcelona, rose 188% from 1996 to 2007, while prices in other inner provinces rose by 175% (101%).
The massive housing boom ended abruptly in 2008, as the global crisis hit and credit dried up. The housing slump has battered the Spanish economy, and brought spiraling unemployment. Developers were left with blocks of unsold properties and massive debts. Uncertainty engulfed the market.
By end-2010, house prices have already fallen by about 17% from the 2007 peak, according to the Bank of Spain figures.
In the first three months of 2008 the average price of private housing stood at EUR 2,101 (USD 2,898) per square meter, compared to December 2013’s EUR 1,467 (USD 2,024), which is the lowest figure registered since the beginning of 2004.
SAREB, Spain’s ‘bad bank’
For several years prior to 2008, the Spanish authorities have failed to monitor uneconomic lending practices and failures associated with the savings banks in Spain. The ease of access and low borrowing costs fuelled the growth of the property and construction sectors of the economy, ultimately leading to a speculative bubble. The initial growth masked the scale of these problems. Soon after, the global credit crunch and the sovereign crisis of the Euro zone ensued, triggering a global recession and leaving creditors with bad debts.
SAREB (Sociedad de Gestión de Activos procedentes de la Reestructuración Bancaria or Company for the Management of Assets proceeding from Restructuring of the Banking System) was founded in 31 August 2012 tasked to separate toxic or problematic assets from the balance sheets of credit institutions that require public support. SAREB is loosely called Spain’s “bad bank”.
Apart from achieving restructuring of the Spanish financial system within a maximum period of 15 years, it also aims to obtain the maximum possible profit earning capacity from these problematic assets.
About EUR 55,000 million (USD 75,839.50) have been transferred to SAREB from nationalized Spanish financial institutions: BFA-Bankia, Catalunya Banc, NGC Banco-Banco Gallego and Banco de Valencia; and banks that have required medium-term financial aid. Of this amount, two thirds correspond to loans and credits associated with the real-estate sector, and a third to real-estate assets.
In 2013 SAREB has taken EUR 54 billion (USD 75 billion) of troubled property loans from the balance sheets of the country’s nationalized lenders, as reported by the Financial Times. SAREB has started placing these assets into portfolios to be sold to investors, which has helped generate confidence that a floor may have been set on prices.
Surge in foreign demand
Foreign investors have started to return to the Spanish property market since the crisis hit in 2008. The Golden Visa scheme, which came into force and is 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 coming to Spain with more than EUR 500,000 (USD 689,700) to invest is automatically granted a residency permit.
"We have already seen a staggering 2,500 per cent increase in Middle Eastern buyers this year versus the same period in 2012, and a 190 per cent increase in buyers from Russia and Lithuania.", said Marc Pritchard, sales and marketing director for Taylor Wimpey España, in a report by Telegraph UK.
The past 12 months in particular has seen an increase in interest in Spanish property by foreign investors looking to cash in on the highly depressed property prices which tumbled from their pre-crisis highs. “Several large deals have been completed for assets that 18 months ago not even the most foolhardy speculator would have touched”, according to Myles Johnson of the Financial Times.
Chavarria Waschke, managing director of Balearics Sotheby’s International Realty, told Property Wire that foreign ownership is still strong and has doubled over the last five years with British, Dutch, German, Danish, and Swedish buyers keen to secure a home in the Balearics.
Demand for Spanish housing from both foreign residents and non-residents accounted for 15.83% of all home purchases in the fourth quarter of 2013 – an increase from 2012’s 11.16%, according to the Spanish Ministry of Development.
The Balearic Islands is especially attractive to the foreign market with 40.34% of total demand coming from foreigners. This is followed by the Valencian community with 35.02% foreign demand; Canarias with 34.34%; and Murcia with 23.62%.
To some extent, demand from foreign buyers compensates for the weak local demand. Foreign demand, which accounted for 1 in 6 property sales in Q4 2013, is becoming increasingly important in the housing market’s recovery.
Property transactions still at record lows
With the surge in foreign demand for Spanish real estate, sellers are inclined to refrain from lowering prices as they hold out for better offers, causing the number of sales to decline 17.4% to 300,349 housing transactions throughout 2013, according to provisional data from the Spanish Ministry of Development. This represents the lowest annual volume of purchases of property recorded in the time series available since 2004.
The regions with the highest number of sales in 2013 were: Andalucía (58,836); Valencian community (47,901); Cataluña (44,587) and Madrid (40,201).
While the regions with the lowest number of sales in 2013 were: La Rioja (2,256); Cantabria (3,127); Navarra (3,251) and Asturias (4,559).
A total of 93,438 transactions were carried out in the fourth quarter, which is 24.44% (22,834 transactions) higher than in the third quarter.
During 2013, second-hand housing accounted for 81.23% of the transactions, compared to 18.77% for new housing. In the fourth quarter, previously owned houses accounted for 80.36% of transactions compared to 19.64% for new housing.
The 17.4% year-on-year decline in home sales was due mainly to the fall of new home sales, which fell by 62.81%, to a total of 18,355 transactions in Q4 2013, while sales of second-hand homes fell by 11.92% to 75,083 transactions – in both cases the highest number of transactions since Q1 2013.
The highest number of new home sales in 2013 was registered in Andalucia with 12,354 transactions, followed by the Valencian community with 6,967 transactions. While the highest number of second-hand home sales was also registered in Andalucia and the Valencian community with 46,482 and 40,934 transactions, respectively.
Interest rates stabilizing
The great Spanish housing boom was fuelled by 15 years of dramatic reductions in mortgage interest rates, from 17% in 1991, to 10%–12% (1995 to 1996), to below 3.5% (2004 – 2005) - among the lowest rates in Europe.
Post-crisis, the average mortgage interest rate in Spain has stabilized at between 2.3% and 3.0% since the second half of 2009, after the European Central Bank (ECB) cut rates in response to the financial crisis to a historic low of 1% in May 2009, where they have remained.
In January 2011, average Spanish mortgage rate rose slightly to 2.88%, from 2.52% during the same period last year, according to the Bank of Spain.
Spain’s housing market is extremely vulnerable to interest rate changes, due to the use of adjustable rate mortgages. More than 80% of new mortgages have had initial rate fixations (IRF) of less than 1 year since 2004 (more than 90% of new loans from 2005 to 2006). In 2010, about 86% of new mortgage loans had an IRF of less than a year; in 2011, about 82%; in 2012, about 78%; and in 2013, it has moderated to around 68%.
Average mortgage interest rate in Spain has stabilized between 3.0% and 3.5% since July of 2010. The Euribor is still unusually low at 0.543% in December 2013 – significantly lower than its peak value at 5.393% in July 2008.
Stagnant mortgage market
Although a total of 300,349 homes were sold in Spain in 2013, only 197,641 new mortgages on homes were recorded, representing an annual decline of 27.8%, according to the National Statistics Institute. This suggests that almost 35% of the home purchases were transacted in cash.
Since the peak levels of 2006, when 1,342,171 new home mortgages were constituted, the figure has fallen by 85.2%.
2013 is the sixth year of consecutive decline in new home mortgages. It has, however, moderated compared to 2012, when the number of new mortgages fell by 33%. In 2011 the decrease was 32.8%, in 2010 it was 6.7%, in 2009 it was 22%, in 2008 it was 32% and in 2007 it was 6.7%.
The average home mortgage debt registered its lowest level in the time series in 2013, at EUR 99,838 (USD 137,717), with a decline of 3.5%, while the capital loaned reduced by 30.3%, to EUR 19,732 million (USD 27,218 million).
The regions which registered the highest number of new home mortgages in 2013 were Andalucia (37,831), Madrid (30,997) and Catalonia (29,690). All regions registered negative rates, year-on-year, especially Murcia (-35.3%), the Basque Country (-34.6%) and Castilla-La Mancha (-34.4%). The lowest negative rates were recorded in La Rioja (-6.6%) and Aragón (-15.4%).
The regions which borrowed most capital for home mortgages in 2013 were Madrid (EUR 4,246 million [USD 5,857 million]), Catalonia (EUR 3,252.8 million [USD 4,487 million]) and Andalusia (EUR 3,215.1 million [USD 4,435 million]).
In December 2013, the number of mortgages granted on homes totaled 12,329, representing a drop of 30.1% over the same month of 2012.
The year-on-year drop in December, in which home mortgages accumulated 44 months of consecutive declines, is more pronounced than in November, when the number of home mortgages fell by more than 27%.
Rental yields falling
The price of renting a home fell by 5.2% in January compared with the same month of 2013, to stand at EUR 6.87 (USD 9.48) per square metre per month, according to fotocasa.es data reported by Kyero News, which also showed a month-on-month decrease of 0.5%.
Since prices peaked in May 2007 at EUR 10.12 (USD 13.96) per sq.m. per month, the price of rental housing has accumulated a decline of about 32%. In fact, eight regions have recorded declines of over 30% since they reached their maximum price levels six years ago:
- Aragón is the region to register the biggest drop in rental prices (around -43%)
- Cantabria (around -38%)
- Valencia (around -37%)
- Castilla-La Mancha (around -34%)
- Catalonia and Murcia (around -33%)
- La Rioja (around -31%)
- Andalusia (around -30%).
Rental prices fell in 12 regions, year-on-year. The greatest decline was registered in Navarra, where it fell by 1.9%, followed by Madrid falling 1.7%, La Rioja (-1.6%), Extremadura (-1.5%), Murcia (-1.3%) and Castilla-La Mancha (-1.1%). With declines below 1% are: Andalucía (-0.7%), Aragon (-0.6%), the Canary Islands (-0.6%), the Balearic Islands (0.5%), Valencia (-0.5%) and Cantabria (-0.1%).
Beatriz Toribio, spokesperson for fotocasa.es, stated: “although rental prices continue to fall due to the current economic climate, we can see that the fall is slowing.” According to Toribio, rental prices will continue to fall this year, albeit “very softly”, and so in some areas of the large cities increases will begin to appear.
The highest prices per square metre in January were registered in the Basque Country (EUR 9.5 or USD 13.1 per sq.m. per month), Madrid (EUR 9.01 or USD 12.43) and Catalonia (EUR 8.3 or USD 11.45), while the lowest were situated in Extremadura (EUR 4.5 or USD 6.21) and Castilla-La Mancha (EUR 4.8 or USD 6.6)
Housing glut expected to clear by 2017
The supply and demand gap in the housing market has been widening for the last five years. The total housing stock stood at 25.3 million dwellings by the end of 2012, of which around 700,000 new dwellings are still unsold, according to Souheir Asba, an analyst at Societe Generale, in a report by International Business Times.
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. The number rose to more than 650,000 annually from 2003 – 2004
- In 2005, dwelling starts exceeded 700,000 and peaked at 760,179 in 2006, due to rising demand from EU nationals
- In 2007 commodity price rises brought rising costs – and starts slowed to 615,976.
- The global financial meltdown brought drastic decline. There were just 328,500 dwelling units started in 2008, dropping to 159,286 units in 2009. By the end of 2010, there were about 123,616 dwelling starts in Spain
- Dwelling starts declined further in 2011 to only 86,252. By year-end October 2012, only 41,008 housing starts were registered
In 2013, licenses to build new homes totaled 33,869, representing a decline of 23.3% compared to the same period in 2012 with 44,162 licenses granted, and the lowest figure registered since 2000, according to the Spanish Ministry of Development.
A total of 58,319 licenses were granted for new constructions, renovations and extensions, representing a decline of 16.2% y-o-y.
By property type, permits for the construction of family houses fell by 22% to a total of 11,315 licenses, while the number of permits issued for the construction of blocks of housing declined 23.8%, to 22,538.
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. By the end of third quarter in 2013, dwelling completions were down to 43,157.
The average apartment size remained at 107 square meters, while the average size for a family home stood at 197 square meters.
Tinsa believes the housing glut will be cleared by 2017 and new constructions will have to pick up by second half of 2015.
Economy expected to grow slightly by 2014
Spain’s economy grew by 3.8% annually from 1997 to 2007, fuelled by the property boom, supported by cheap mortgage credit and the surge in residential construction. At the height of the housing boom, total investment in housing was 7.5% of GDP in 2007, significantly above the OECD average.
The economy plunged into recession in late 2008 when the real estate bubble burst. It managed to escape an 18-month long recession in early-2010, but has failed to record any significant growth since then. In 2011, the economy recorded a meager growth of 0.5%, after experiencing annual declines of 3.8% in 2009 and 0.2% in 2010. In 2012, the economy slid to recession again and contracted 1.6%, according to IMF.
Last Jan. 23 2014, Spain became the second euro zone country to exit its international bailout program, after Ireland.
GDP shrank 1.2% in 2013 from a year earlier, but grew 0.3% q-o-q in Q4 2013. This is the second quarter of expansion after over two years of recession and the fastest growth seen in six years. The Spanish government expects the economy to grow by about 0.7 % in 2014.
Spain saw a meaningful pickup in exports last year, but the housing and construction sectors are still lagging behind.
The construction industry is a key employer of low-skilled workers in the country. The increase in construction activity in the past helped pull unemployment down to 8.3% in 2007 from 24% in 1994. With the situation now reversed, the unemployment rate skyrocketed nearly 25% in 2012. Currently the unemployment rate stands at 26%, which the government hopes to trim down to 25% or less by the end of 2014, which is among the highest levels in the OECD and still twice the euro area average of 12%.
- Spanish housing market recovery continues - May 18, 2017
- Spanish house prices rising, foreigners buying, economy growing - July 20, 2016
- Spanish transactions rising, thanks to foreign buyers - August 12, 2015
- Spain's housing market is recovering - July 20, 2014
- Spain’s house price falls decelerating, near bottom? - March 24, 2014
- Spanish house prices in freefall, amidst struggling economy - September 11, 2012
- Bank of Spain warns of further house price falls - March 29, 2011
- Bank of Spain warns of further house price falls - March 29, 2011
- Spain’s housing market still in trouble - September 21, 2010
- Spain in real trouble - November 06, 2009