Spanish Property Update

Back in 2007, Spain was having Fiesta after Fiesta like it was 1999 on the back of a real estate bubble. After the fiesta came the hangover, which the Bank of Spain now says will keep the real estate sector in recession until mid-2011 at least.

Spain’s economic miracle of the last decade was largely just a mirage built on an unsustainable bubble in the real estate sector. When that bubble burst, as it did in 2008, it sent the Spanish economy into a tailspin. In the latest report released last week the Bank of Spain now says the real estate sector won’t start to recover until 2011, casting doubt on recent press reports suggesting a housing market recovery is already underway but that view should be kept to high end sales only

The number of homes sold in April, excluding social housing, rose by 16.8% compared to the same month last year, according to the latest figures from the National Institute of Statistics (INE).

following chart shows how residential property transactions have risen every month this year, having fallen every month last year.

On a monthly basis, however, home sales fell by 9%, from 33,632 in March, to 30,659 in April. Sales have fallen in April in 3 out of the last 4 years, so the fall is likely due to seasonal factors.Once again, sales growth was not uniform around the country. Sales exploded by almost 90% in the Balearics, but fell 13% in Malaga province, home to properties in Costa del Sol.

All of which is bad news for the Spanish economy, dependent as it was on the real estate sector for jobs and growth. “The housing market adjustment has sever macroeconomic implications in the context of the recession,” says the BoS report. As a result of the property crisis, the sector has shed 2 million jobs. The BoS says that, by the time this drama is over, the property crash will have reduced the Spanish economy by 5.4% compared to the end of 2007.

The BoS also has a stab at quantifying Spain’s glut of newly-built homes, which it estimates at between 750,000 and 1.2 million new homes for sale at the end of 2009 (developers say just 700,000). “The stock of property is high, which one can expect to condition the number of housing starts in the next few years,” says the Bank. That’s another way of saying don’t expect the residential construction sector to recover any time soon.

What happened during the boom In a nutshell, a wave of cheap credit sent property prices and housing starts through the roof. It was never going to last for ever, but the credit crunch made sure that it came to a particularly brutal end. When credit crunch struck, the house of cards collapsed.

investment will continue contracting until the middle of 2011,” In 2007 it peaked at 7.5% of GDP, way above the OECD average. Next year the BoS forecasts it will fall to 4%. At that point, residential investment as a percentage of GDP will have fallen below the minimum it reached in 1994, during the last recession.

So what do we make of all of that, in simple terms just make sure you buy in 2010