International Interest in Spanish House Prices

Last week I spoke with a journalist from the Norwegian Financial Times who was trying to make sense of the official house price data and marry that with some market sentiment. Meanwhile, people are clearly getting sick of the lack of reliable house price data in Spain.

Here’s what I said to the journalist. The only reliable set of figures produced by the Ministry of Housing in Spain is the actual number of property transactions each quarter. Download a copy of that data.

This shows there were 96,155 transactions in Q1 2010 versus 93,095 in Q1 2009, 145,669 in 2008, 211,799 in 2007, 222,720 in 2006 and 186,667.
From a volume perspective, the market was at its peak in 2006 and has been declining since then, bottoming out sometime in 2009 (assuming that the growth experienced in Q1 this year continues). In volume terms, Spain is currently turning over less than half the number of properties it did at the peak.

As an aside, all of our internal business metrics we track at Kyero.com bottomed out in October 2009 and have been increasing steadily since then.
All the other figures that the Ministry produces can be safely ignored. Their figures are also only available per province and for a few large towns within each province – a level of granularity which renders all of these figures meaningless.

As an example, Granada province is home a whole range of mini property markets. It has a thriving university city, well-developed coastal resorts, and sleepy rural economies – and much more besides. According the Ministry, this is a single housing market, with a single average price – clearly nonsense.
So, all we can learn from the Ministry’s figures is the volume of houses being bought and sold. To understand if the market has bottomed out yet, we need to turn to another set of figures – my favourites are produced by TINSA.
TINSA is a property valuations company and they perform valuations for mortgages – so they can be suspected of having a bias of supporting the businesses of their primary clients – the lenders. However, the curve of the graph on their price index accurately describes the phenomena we’ve witnessed happening in Spain.

They describe a steady increase in house prices until sometime late 2007 / early 2008 – and a steady decline since then. According to TINSA, prices are still declining across the board and are currently sitting at around 20% below peak value.

Personally, I’d take issue with the scale of that decline, but I think the overall shape of their graph accurately describes the trend of house prices still falling, but more slowly than previously.

So what about actual house prices? What is property actually being sold for, and how much has it fallen by?

First off, it’s important to establish what baseline we’re starting from. I bought a house in Almuñecar in 2005 for €210K and sold it in 2009 for €270K. At some point in 2008, I believed it to be worth €320K – but who knows? I didn’t sell it then.

That’s the problem with property values, they’re only true at the point of sale. Until a transaction takes place they’re entirely theoretical. Did I make a 29% profit between 2005 and 2009 or did I make a 16% loss between 2008 and 2009?

Unfortunately, even though actual transaction prices are notarised, they are not shared with the general public. There’s no Spanish equivalent of the freely-available government data in the UK – which is why we, and the larger Spanish portals, analyse asking prices – it’s all we have.

However, even a quick look at our Spanish house price index will be enough to tell you that asking prices in Spain do not even roughly approximate to transaction prices. Over the past 18 months the average price hasn’t moved at all – hardly representative of the actual declines we know from first-hand experience have occurred.

Selling my own house and getting 16% less for it than at the ‘peak’ is probably quite typical of what has happened to better-than-average properties in good locations. I also know of good properties sold at a ‘discount’ of over 50% because the seller was in a hurry.

My best guesstimate is that good properties will be changing hands now in the 15-20% discount from peak price. Those less desirable homes, in 2nd tier locations or where there is a lot of property stock will be more heavily discounted – perhaps up to 50%.

If and when the banks dump their stock of repossessions on the market at ‘realistic’ prices, that picture could change again.

As Fitch comment in this article, with the fragility of the Spanish economy, it seems unlikely that a housing recovery will come about through increased spending by Spaniards.

Even though the unemployment rate fell recently, the newly employed or those who managed to hold on to their jobs are far from bullish about their own short to medium term prospects. People in these situations don’t buy a first home or upgrade to a bigger one.

This alone will suppress house prices in Spain because Spanish buyers account for 90% of property transactions.

Until national confidence returns, buyers from other countries are well positioned to buy property at knock-down prices while we are at or near the bottom of the property market.

Would I buy a property in Spain now? Yes, and here’s how I’d do it.

• Ignore the asking price
• Negotiate hard and be prepared to walk away
• Buy a property that a Spaniard would buy
• Buy in an area without a lot of unsold properties
• Get independent legal advice

The days of successful property speculation in Spain are long gone for all but the most hardened professionals. For the rest of us, Spanish property is, and should always have been, a lifestyle choice.

Will you make money on a Spanish property you buy today? – probably if you hold on to it long enough. Will it be the best investment you could make? – probably not if that’s your primary objective.

Martin Dell, Kyero.com