Tuesday, January 04, 2011

Expert Predictions for 2011 Spanish Property Market

A good overview of the market for 2011. Segmentation in the market is key.


Expert Predictions for 2011 Spanish Property Market

2010 is history and December marked the end of a year of change for Spanish real estate. But what awaits the property market in 2011?

Will the unsold housing stock be absorbed by a recovering market, or will this force even lower property prices in Spain?

Will the Euribor – the most commonly used indicator for mortgage rates – start to rise and send mortgage payments higher, and will finance become more readily available?

We’ve taken a look at the Spanish press and expert property market commentators in Spain to give you their take on 2011 and the Spanish property market.

The Rise or Fall of Spanish Property Prices in 2011

Key indicators from 2010 show that the trend of the housing crisis altered for the first time since 2008. During the first six months of an uncertain 2010, property sales started to show an increase and the fall in prices softened as the months passed.

Many people wonder if after last year, prices will drop further or return to growth, Gonzalo Bernardos, Vice President of Economics at the University of Barcelona said:

From my perspective, the price adjustment, although it has been high and significantly higher than indicated by official statistics, is not yet fully completed.

It’s a similar view from Edward Farrelly, Director of Research at CB Richard Ellis (the world’s largest real estate services firm), who believes that “prices have now normalised.”

The rate of decline in prices is certainly slowing, but “not enough for us to be able to say that a recovery could begin,” concluded Farrelly.

However, prices do not show a decline in all areas of the country. In large cities where there is little surplus property stock, they may even have increased.

In locations with a larger surplus, such as developments targeted at holiday home owners, it is estimated that there will be a more severe price adjustment.

Bernardos estimates that tourist resorts will see a further price reduction of between 15% and 20%, new residential developments in medium-sized cities will fall in value by about 10%, while the less affluent neighbourhoods of larger cities will need to reduce their prices by 5%.

Mortgage Costs and Availability in 2011

Fernando Vizoso, manager at KPMG’s Department of Infrastructure in Spain reveals another fundamental factor that will determine the direction of property prices: “The key to 2011 is access to finance for buyers”.

“If this situation does not improve, coupled with the general economic conditions, the depressed market may continue along with moderate price adjustments in certain segments,” he concluded.

All experts tend to agree that central areas in the richest cities will be the first to recover, if they have not done so already.

How the market absorbs the remaining oversupply of property (which the Ministry of Housing estimated at 688,044 homes and BBVA Research Department believes is more than one million) is another matter.

Vizoso considers that the absorption of this stock will depend on the improvement in the overall economic situation in Europe as a whole, while Bernardos notes that in many areas it will be difficult to sell the surplus homes.

“These developments are like Shrek’s Swamp: areas in which there is almost no demand and where the volume of empty properties could take several years to sell,” said the Professor of Economics.

One of the advantages of buying a property now though is to take advantage of low rate mortgages, mostly based on the level of the Euribor, which at the end of November stood at 1.528%.

This is low compared with the ‘boom’ period when it reached 5%. Therefore, taking a fixed rate mortgage now will mean payments that are likely to be significantly less expensive than in the future.

“Everything points to interest rate changes making small, steady increases, but it is not unreasonable to think that in the near future we could see the rates of 2007 or 2008, when they were around 4% to 5%,” added Vizoso.

Tax Relief for Property in 2011

The introduction of various tax changes came into effect from January 1st 2011. These will also have an influence on the property sector in 2011.

To begin with, it is likely that the prospect of abolishing the tax deduction for the purchase of a Spanish home will have created a mini-rush to buy homes before the end of the year – a similar event happened in the months before the VAT rise in July 2010.

Figures from KPMG show that the new housing market will have benefited the most by this measure, while resale homes are less likely to have gained as this market is more closely linked to general economic conditions in Spain and Europe.

“The best month in 2010 for sales will have been December. There are many upper-middle families who ensure that no tax relief is wasted (in some cases it enabled savings of more than 30,000 euros) and property would have been purchased before year-end,” said Bernardos.

“It would not be surprising to find out that December 31st turned out to be one of the notary’s busiest days” suggested the Professor.

From 2011, the abolition of this tax measure will therefore increase the economic effort of families to buy a home, especially new housing. Unless a new property gets a discount of 17%, it will not equate to the savings previously provided by the state deduction.

Although there is a widespread decline in housing prices, it is unclear to what extent or how long it will keep dropping and as the sector recovers from the crisis, falls are becoming more moderate. Fernando Vizoso argued:

It remains to be seen whether future cuts in housing prices will offset the loss of tax relief.

Alternative Real Estate Activity through Rent, Rehabilitation and Social Housing

The significant tax changes in Spain for 2011 may push the industry to promote other lines of business. “The sector is undergoing a major restructuring phase, which includes not only the refinancing of its debt, but also the designation of new business plans for the future,” says Vizoso

“It would be desirable in the long term for there to be a resurgence in the rental market in Spain.” he added

The government has even put in place policies to promote other areas of property development, such as rehabilitation and renting, at the expense of buying and selling homes.

Secretary of State for Housing, Beatriz Corredor, has reiterated that rehabilitation will be the new economic ‘pillar’ of the construction sector.

Last April a new tax relief of 10% for energy improvement works to housing was implemented, that covers the replacement of all electrical, water, gas or other household supplies, as well as any work that promotes accessibility to buildings or homes.

The relief is valid until December 31st, 2012 for the large majority of taxpayers – those with an annual income of less than 53,007.20 euros.

With regards to the rental market, Farrely warns “It’s still cheaper to buy than to rent.” With Vizoso adding, “In the short to medium term, cultural and socioeconomic factors may prevent the rental market having a comparable proportion of the property sector as that of other European countries,”

“Rentals is an important sector that, if not encouraged, should at least be allowed to function within a neutral fiscal policy.” added the CB Ellis Director.

After the last amendment to the State Housing Plan and Rehabilitation (PEVR) 2009-2012, VPO (Vivienda de Protección Oficial, the equivalent of protected or social housing) has been given additional “leeway”.

The period of aid to repay loans aimed at VPO has increased from 10 to 15 years. Also, owners will have an extra two years to qualify unsold property as protected buildings.

However, there have been cutbacks in this sector too, the government having eliminated many grants for the purchase of VPO, such as direct aid to help in paying a deposit.

These alternative sectors in the Spanish property market have not convinced Bernados though, he concluded:

Economic adjustment is essential in these times, but it is a real waste to direct aid to VPO, rental or rehabilitation. The government needs to provide new incentives for actual home ownership.

So as 2011 begins, the overall opinion of the domestic property market by experts is at least realistic that the market is still undergoing changes, but that things have improved in 2010.

If general economic conditions continue to stabilise in Spain and Europe, 2011 will certainly be the most positive since the crisis began. This time next year, we will no doubt be looking back at 2011 as a pivotal year for Spanish property.


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