Spanish Property

Spanish Property

I notice I have written an article about Las Hurdes without telling you where it is, which is a bit silly; so, here is an addition to last week’s blog.

Las Hurdes is a mountainous region to the south-west of Salamanca. I did get a map image from Google, but obviously forgot to insert it in the last post. Sorry about that.

Okay, back to today’s post.

With all the dreadful news around, is Spain really a disaster zone, or not?

I have always maintained that the disaster in the Spanish property market is largely confined to the tourist spots, where there has been a massive overbuild, and they have quite simply run out of buyers. On the other hand, the spill-over has left many normally sellable Spanish properties in a state of limbo. What to do?

A telling indicator is a graph showing online searches for Spanish properties for sale. It’s been going down for the past five years, and looks to be going lower.

These things happen, and there is nothing we can do about it. The fact is, Spanish builders went mad, building far too many properties, and it is going to take a long time to sell them all.

Then of course there is all the nonsense with the banks, and the politicising of the euro. The EU banking system has to re-schedule €8 trillion worth of debt over the next fifteen months. That is not feasible. The system is broke. The only way that level of debt can be dealt with is by default, or by printing money to cover the hole. Default will lead to a massive loss of money. The debt will be written off. That funding will be sucked out of the system. Such a result would be deflationary, and will make borrowing money even more difficult.

Money printing will eventually lead to inflation, higher interest rates, and the erosion of wealth generally, including house values. This will effect the whole of the euro-zone.

In neither scenario is holding real estate the best investment policy. By all means hold onto your Spanish property if you have low or no debt levels. If the Spanish house is your home, then I guess you have not much alternative but to sit tight. Things will get better, however, it may take some time. If you can, hold on. Prices can go lower, but probably not much lower. They will eventually recover.

The only good thing about any of this is that most of you who’ve been regularly reading these bulletins have already bought in the right places. A lot of you have bought in one of my favourite spots in Spain, down in the far south in the province of Cadiz. I think most of you will escape the worst of this downturn, and anyone thinking of buying in this area may well be surprised at what can be found. It’s also a good lifestyle down here, and there is a lot going for it. Meanwhile avoid the tourist zones of the Costa del Sol and the Costa Blanca. The overbuild there is so vast it will take a decade at least to clear. To those who are still thinking of buying, look inland at the towns where real people live and work, and leave the holiday black spots well alone.

John

Wither Spain and Portugal?

Let us have a look at what is happening to real estate in Spain and the Algarve, and, armed with that knowledge, see what the year ahead has in store for us.

There are several factors that control what happens to the housing market. Let’s first list the factors that have little or no influence at all. Those who want to buy may be an important group, but more likely they are of no importance at all in the market. Why do I say that? Simple. I want to buy an aeroplane as I love flying. However, I wont be buying because I cant afford one. The same goes for that Ferrari I fancy.

How about those who do want to buy and have the equity but not the cash? The boomers are beginning to retire. There are a lot of them. They may well fancy retiring to the Algarve, but can they sell their home in Northern Europe?

We need to analyse these situations and see whether they are indeed favourable for the housing market in the south.

Secondly we need to look at the value of real estate south of the snow line. Are the prices realistic, or are they inflated?

Thirdly, we need to look at the current state of the market: how much real restate is empty and up for sale?

The retiree market is in trouble at the moment for the simple reason that people with homes in the UK, and especially in Ireland, are having serious trouble in selling. Unless they can sell for a suitable price they wont be buying here. There is also the problem set by the high value of the euro. When I first came to live here the exchange rate was about €1.55 to £1. Recently it has been trading around €1.20 to £1. That makes euro-priced houses much more expensive. The exchange rate alone has pushed up the price of a home to UK buyers by more than 20%. That’s some hike to cope with in a recession. As the English have traditionally been the biggest buyers that is a big dent in the market.

For the Irish there is the problem of house values back home. They have dropped by between 30% and 50% already. In some cases a similar drop is likely. They certainly wont be out in force as buyers any time soon. That is also another big dent in the market because two or three years ago the Irish were buying in droves.

Any buyers will have to be coming from countries like Norway, where economic conditions are still relatively rosy, or from countries where the number of existing emigrants has so far not been very high. All I can say here is that I hope they will be coming. We desperately need them.

With crashing economies in all directions the emphasis is now on value for money and downright cheapness. Is Spain or the Algarve cheap?
Let’s go back and do a simple bit of maths. There are two calculations you can do, but the most important is simply to work out what it would cost to rent, and then see how the price to buy stacks up against the rent. If it doesn’t stack up there is little incentive to buy when you can rent more cheaply, and if you want a change, you can just give in your notice and walk.

Alternatively you could look at your purchase as a business venture, and base the value on a simple rental return. Your ROI would then be the percentage return on the cost of the house or flat. If that return is less than about 7% (the usual market rate) it would be a lousy deal, and no businessman would entertain it. Conclusion: the purchase price would be too high.

You need to find out what your apartment/villa will realistically rent for. Let’s say you can get €100 a week for a small two bed apartment. If that €5,000 rental return equals a 7% ROI, then the purchase price would equal about €70,000.

The other way of calculating value is to see if the cost of the purchase is roughly the same as the cost of the money needed. If you rented that apartment the annual rent would cost you €5,200 a year. If you borrowed money to buy the property, would you be paying more than that or less? Money costs about 3.8% these days. What this means is that by this calculation your flat is not really worth more than €125,000.

So there you have it. If you can get €100 a week for your nice apartment it is in real terms worth somewhere between €70,000 and €125,000.
If you want to know where you stand on the value scale you first have to find out what you could realistically get from renting (always assuming the customers are there in the first place), and then ask yourself why any sensible person would pay more to buy than they would to rent.

Remember I am trying to compare like with like. I am comparing the cost of the rent with the cost of the money. And dont tell me you already have the money so it doesn’t cost anything. That ignores the opportunity cost. If you spend the money on a flat you dont have it available for any alternative investment, and in these hard times cash is king. You can get serious returns on money these days. If you are getting less than 10% you are simply not looking in the right places. 10% of €70,000 is of course €7,000. The rent is nowhere near that, which makes that alternative valuation of €125,000 look a bit high. Why would any sensible person give up an investment bringing in €7,000 to buy something you could rent for €5,000?

Capital gain perhaps? Ha ha. There wont be a capital gain on something that is too expensive in the first place. To get your capital gain you have to buy cheap, and in hard times, super cheap.

Finally, let’s have a look at the state of the market. By this I mean the number of properties for sale and the number of buyers out there.
Take a walk round Lagos. There are empty apartments as far as the eye can see. Try Portimao; the same problem. Behind me is a whole estate that has been built for two years. There are fifty or sixty apartments. About six are inhabited. Wherever you look are empty buildings. There are probably 50,000 apartments for sale, and half as many again would be for sale if there was any market for them.

Go across the border into Spain. There is a totally empty estate built where Ayamonte faces the Guadiana. The Esuri estate the other side of the motorway has about 12 residents. It’s about the size of Welwyn Garden City. Drive along the coast to Huelva. There are miles of the darn things. Keep going right round to Barcelona. It is going to take more than a decade to shift this lot. Prices of apartments should be on the floor. They will be for years.

I’m sorry to say the news is not good for tourist-land. Prices have gotten way over where they should be, and, sad to say, what goes up, usually has to come down. What a bummer!

Okay, that’s for tourist apartments, but what about villas perhaps in inland towns and villages?

Here things are slightly different. If you are out of a tourist trap you can at least sell to locals instead of relying solely on expats and tourists. That means you have a much better chance of actually getting a sale in the first place. That is a major advantage.

Secondly, there are far fewer units for sale. You dont have that massive overhang in the market that will keep seaside tourist spots in the doldrums for years. Inland you are far more likely to find that prices stabilise sometime over the next year or so. Not only that, you will find that by buying outside the tourist traps you will be buying into a far less risky market. I think tourist properties will continue to decline in value whereas those in proper independent towns will hold their value.

You will note that on the Unique Property site we dont sell apartments. We sell properties that already have an individual value. The individualness will in all probability mean that prices will be largely maintained, and any losses will be minimised.

What I cant predict is what will happen if the euro starts to fall apart. But if it does, prices across all of Europe will be affected, and I haven’t a clue how the chips will fall.

Welcome to the Surreal World

Yesterday I wrote a song I’d been meaning to write for years. Actually, it’s on a theme I use quite a lot in my songs. We live in a surreal world. This one went straight to the point tho instead of pussyfooting around it.

The song goes something like this. I go out in the morning and read the paper. It tells me we have just had our fourth best year for tourism here in the Algarve. I walk down an empty road, past empty restaurants, empty apartments, depressed shop keepers, and can see as I continue on my way that this is the worst year in the last decade. So what’s this fourth best all about?

I read about global warming. Last summer was cooler than usual. This year has got to be the coldest wettest year we have had. I am certain May was the coldest since records began. In  Iowa the harvest last year was stopped by heavy snow falls. But of course the world is getting warmer.

Governments that are stuffed to the gills with debt are solving their problems by getting even further into debt. People seriously think house prices will go up this year, and even more next year, despite the obvious fact that unemployment is up, wages are down, and the banks are locked into a death spiral.

It’s all surreal.

We live in a world where everyone and his dog has been to university. Our local rag last week did an article on someone who had received a PhD in Watercress from the University of Bath. Now if that isn’t a bit of surrealism….. well, hold on, maybe it isn’t surrealism, maybe it just proves what I was intending to say….. that everyone and his dog has a degree in something useless these days, and most of those degree-enabled people cant find or hold down a job.

Never mind about the rest of the song, which deals with the pure surrealism of quantum mechanics, religion, and other insanities. The real question is: how the hell can anyone think in an upsidedown world?

I remember travelling round Yugoslavia in the seventies. The Beach Boys did a great gig in a school yard in Belgrade. They then went round giving away the money they got for the gig because they couldn’t take it out of the country. Meanwhile the kids went home to the back bedroom. Those kids were 19, or maybe 23. Some of them were 29. Some of them had gotten married, and the married couple were still living in the husband’s bedroom back home. They couldn’t afford to move out. Mum and dad lived in the front bedroom, one kid shared with another in the second bedroom. The married couple were in the third, and another married couple were sleeping in a makeshift room added on the back. No-one could afford to leave home.

This was the picture of state socialism forty years ago.

After years of struggle Yugoslavia finally made the grade, and slipped its way out of the government-run mess, and became something…. briefly.

What seems odd to me is that the capitalist countries in the west are now taking to this “new” model. America has embraced state-socialism over the course of the last two years. France is already far down that road. Now Spain is heading that way as well.

Have you been to Spain recently? Have you noticed all the jovenes? Probably not. They aren’t that visible, but it’s Yugoslavia in the seventies all over again.

There is massive official unemployment (20%) in the country. The real figure is closer to 30% as the jovenes are either still at school or still at home, or simply running errands for their parents. They aren’t that young either (joven means young), maybe 29, or even 35. They cant get jobs, they’ve got no money, except their hand-outs, they cant afford a home, they cant afford to get married. And this is the generation of the future!

As far as I can see, before the end of the decade there will be one worker supporting one lame duck. Excuse me, but the finances simply wont hold up. The place is heading for a complete breakdown.

Does that mean it will end up being a great place to run to, because it will end up a disaster zone where nothing works, and things have to be cheap? Will it be a country with crime rampant, and bread queues, and nothing in the shops?

Who knows? I live in a surreal world where folk see the government screwing up big time, and still they think the government will solve their problems. I’m old enough to remember nationalised companies in Britain; companies that were run by the government; and what a mess they were too.

Spanish socialism however has already managed to run out of money. Government debt is unsustainable. They are already a quarter of a trillion euros short just for the rest of this year. A quarter of the population either out of work, or being supported by their family. No job regeneration in sight as the taxes on labour are extortionately high. Half a million empty homes that no-one wants. A banking system in tatters.

Maybe a country on the rocks will be a great place to go to. How should I know. I am like Alice in Wonderland. Every way I turn someone smiles in pain and says something incredibly silly. I live in a Surreal world. The signposts have all been repainted by the government. They all claim to lead to somewhere nice. I am beginning to wonder if it is a mistake to be sane in a mad world.

The Spanish Property Market

This is what I put in my property newsletter for the summer of 2007. I am gradually transferring some of that material into this blog.

You can check out the newsletters by going to:

http://www.property.org.uk/unique/newsletters/newsletters.html

I’m also transferring some to show that I can tell you what the market is doing, and what it is going to do. I’ve been doing this for years. I’m good at it. You could be too if you read my new book on the subject, which I finished this morning. I’ll post a link to it sometime later this week if all goes well.

So what did I say three years ago about the Spanish property market? Here it is:

Are you about to buy property in Spain? If so, then dont.

Have you bought property in Spain any time during the last three years? If so, prepare for a shock. You could be sitting on considerable negative equity in a year’s time.

Have you bought into any Spanish off plan deals since 2003? If so you are undoubtedly sitting on negative equity as most off plan deals are selling at roughly twice the resale price of similar property.

When doing my research for my book The Little Off-Plan Book I checked out the prices of off plan deals in parts of the Costa del Sol, and compared them with resale prices as advertised in the local papers. The off plan deals were running at approximately twice the price of the resale properties. Anyone buying into these deals is buying negative equity.

But what about the bank valuations you might ask? Yes, what about them? As I say in my other property book, After the Property Boom I’ve sat in on meetings at the bank with developers who want to finance their next deal. They need the bank’s money, and of course the bank needs to lend money to stay in business. So they connive at selling off all the unsold properties so the lending is split among lots of individuals, which makes the lending safer for the bank, rather than being tied to one borrower, the developer, who will go bust if the properties aren’t sold. It also means that with the properties sold, they can now lend to the developer on the next deal. It’s a great way for the banks to operate, and grow their business.

When you see the term “bank valuation” you should translate that as “phoney valuation”. The only true valuation of a property is what it will fetch on the open market, not what some guy from the bank says it’s worth. You can find a better valuation by looking in the paper at the property ads for similar products.

But what about all that instant equity you might ask? Okay, fine. What can you do with it? Can you take instant equity and go and buy yourself a nice meal? A bigger car? A yacht? All you can do with instant equity is get yourself more debt. If your debt is secured on negative equity you have just dug yourself a whopping great hole. In short, every time you try to pay off your big mortgage you are throwing money down a hole. You are paying off something which doesn’t exist: that high valuation. You would be better off taking the keys back to the bank and saying Goodbye.

Let’s have a closer look at Spain, its building industry and the general economy. And let’s compare it with America where there is a real estate melt-down.

Since 2000, Spanish house prices have doubled. That’s more than any other country in the western hemisphere, even Ireland or the U.K.

Not only are prices extremely high, they’ve become totally unaffordable. The house price-to-income ratio is one measure of this. In Spain, the ratio is more than seven. In other words, on average, in Spain, people’s houses are priced at seven times their annual pre-tax income. Compare this to the U.S., where the ratio is 4.5. In other words Spain’s homes are almost twice as expensive as American homes. And the prices of American homes are crashing. What do you think will happen to Spanish prices? Do you seriously think they will go up?  Ha ha!

Last year, 800,000 houses were under construction in Spain, that’s more than in Italy, Germany, and France combined. Excuse me but doesn’t that sound like a spot of over-supply? What happens when supply balloons? Thats right, prices fall. And please note that this building glut is just less than half the houses under construction in the U.S., while the U.S. population is six times bigger than Spain’s.

In the good old days before the euro, the Spanish government could control this rampant over supply by raising interest rates. They used to be at 12%. That tended to keep things under control a little. Now interest rates have been around the 4% level for some time. They were 2% 18 months ago.

This sounds very similar to the American situation where interest rates were 1% a few years ago, but are now sitting at 6%. This is bad news for those on adjustable rates. Hold on: in the U.S., only 50% of mortgages come with adjustable rates. In Spain, 90% of mortgages are issued with adjustable rates. So the Spanish consumer is much more sensitive to rate hikes than the American consumer.

In the U.S., the construction industry makes up 8% of the total labor force. In Spain, 13% of the labor force works in construction, and construction investment measures 18% of Spanish GDP, up from 11% in 1998. This means that the Spanish economy is much more dependent on the sale of house to gullible foreigners than is the US. With falling prices in Spain construction companies are in trouble, and bank lending is being severely restricted. This will impact on the labour force, which is going to get cut in half. That means another 6% of the population out of work. Yikes! 6%!! What is that going to do to the Spanish economy in general? And what is it going to do to house prices?

Spain can do nothing about interest rates. They are set in Germany where the housing market has been slow for years, and is only now starting to move upwards. This is exactly the opposite scenario to Spain. This means Spain is in big trouble. The Bolsa (Spanish stock market) has already seen big falls in construction company stock valuations. The general market has dropped by 10% in the last year alone. There is more to come as this situation is only just beginning to unwind.

All this is before the foreign investors begin to feel the pinch and start to panic about their negative equity. When that hits them in the face how many are going to be panic selling, driving the market down even further?

All I can say is, if you want to buy in Spain, wait until this mess unwinds, and the market crashes. Then you will be able to buy some quite amazing deals, perhaps for a third of the price you would be asked today. Whatever you do do not buy at these prices just before everything is about to fall off a cliff.

If you have bought into an off plan deal sometime during the last three years I cant advise you. You made a damn silly decision in the first place and I guess you’re stuck with it. The real problem with this scenario is that you have already lost money. Waiting for the market to catch up with you is going to take a very long time.