Spanish Properties Overvalued?
July 27th, 2005
Estimates from the Bank of Spain state that house prices in Spain were overvalued by as much as 35 per cent last year, issuing warnings that the property market could fall victim to rising levels of household debt, and stressing that Spanish households are vulnerable to ‘certain macroeconomic or idiosyncratic shocks’.
According to the Bank Spanish households have seen debt levels soar to levels far in excess of disposable income for the first time in 2004, up from just over half in 1997. Borrowing has risen to a record EUR 595 billion over the past eight years, up from EUR 200 billion in 1996. This equals 74.5 per cent of the country’s gross domestic product.
For foreign property investors however the situation might not be as bad as expected. Indeed, prices have jumped dramatically by some 150 per cent since 1997, but they are still significantly lower than in other parts of Europe, particularly the UK where property values are approaching an average of GBP 190,000. For many, the primary concern is that the housing market is overly susceptible to factors such as interest rate changes, asset prices or household incomes for example. Indirectly, these are the kinds of factors that could impact strongly upon the position of foreign investors. However with Euro and UK base rates looking under downward pressure problems are unlikely.
It has been speculated that the Spanish property market could see a slump in house prices if interest rates rose, economic growth continues to slow, and EU subsidies dry up. This could spell bad news for sellers and investors, especially if the new build property boom was to continue apace. However with Euro base rates likely to lower UK buyers and investors are unlikely to suffer a loss of value in tourist areas. Problems would more likely affect people living in Spain, which currently has one of the highest owner-occupancy rates in Europe at 90 per cent. For foreign investors a key concern is that an oversupply of cheaper properties in popular holiday locations is making it more difficult for investors to put down deposits on off-plan properties and then sell them on at profit before final completion.
Many of these investors are finding themselves without prospective buyers, making the ‘off plan’ property purchase scheme largely unworkable and Assetz, a property investment specialist has advised against buying off-plan to sell before completion if you you don’t have the funds to complete if you find you need to.
Figures indicate that property currently represents somewhere in the region of 40 per cent of all capital investment in Spain, with a sizable proportion of all Spanish economic growth attributed to the property boom that began in the mid-nineties.