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. |
© John Clare 2007