Summer '07 - the Spanish property market conundrum - 30th May 2007

The dust is beginning to settle on the recent fears over property price crashes in Spain, so it’s becoming clearer how this is going to affect the 250,000 Britons who already own property, and for those who are considering buying on the Costas and elsewhere in Spain.

The recent media reports of an imminent crash in Spanish house prices seems to be overstated, despite the reality of a drop in share prices for some of Spain’s prominent property sector companies. Worries of debt and potential oversupply of properties, coupled with an economic overview from the Organisation for Economic Cooperation and Development, which found that some Spanish property was overvalued by up to 30%, caused a slump in share prices by over 60% in some cases. The investment in new development means around 800,000 new properties are being constructed this year, 200,000 more than in 2006, adding to the belief that Spain is saturated with property.

Spain has been in the spotlight recently, not just for the recent stock market jitters, but also with media reports of land ownership scandals, irregularities in planning and building regulations and land grab traps. Add this to the stabilising of property prices since 2003, and the focus for bargain seekers moving towards the emerging markets such as Turkey and Eastern Europe, is Spain losing its grip in its pulling power for the British pound?

This is not necessarily the case, and the overall message to those already owning property or looking to find a mortgage for a property in Spain is – don’t panic.

Many of the British citizens owning properties in Spain have seen their property rising in value by an average of 10 per cent a year over the last five years, indeed for those investing in the late 90’s, in some areas prices have risen by 270 per cent over the last decade. Although the returns are now lower than in the past, this can be seen as Spain having become a mature market, and there is no reason to think that the possibility of a collapse in the Spanish property market is any more likely than in the UK.

A major underlying reason why fears have arisen around property prices in Spain, is that projected return on investment for new developments and off-plan purchases have not stacked up to actual price increases over the past two to three years. The property boom in Spain, where significant increases in value were seen over relatively short periods of time peaked around 2003, since when the market has normalised. The massive investment in property development has in itself been a player in this, in that the number of newly completed projects and projects in construction have lead to price competitiveness, reductions in costs for stage completion and an end value that is lower than that originally thought.

Simon Attrell, Spanish mortgage specialist at Conti Financial Services (CFS), supports this by saying: "We completed a deal recently for a client who had bought two years ago for £280,000. He was told on buying that he would get £360,000 now, but the bank valued it at £291,000. A key issue in the Spanish market is the Bank of Spain making the lenders independent valuers, who are now providing more realistic valuations on the 'new build' or recently 'constructed' 'brand new' properties. There is no overall property crash in Spain. The perceived problems lie only in the new build market where the properties are simply not realising the value predicted when the clients originally agreed to buy them. It is only this market which is affecting Spanish properties - not re-sale or pre-owned properties, in fact, if anything it's much better for a client to purchase a re-sale property in Spain as you are getting a good idea of it's true market value at present. Spain has very much become a buyers' market."

However, press reports may have failed to make this distinction and see the new development market as indicative of the market as a whole, leading to disaffection with the British market for property purchase in Spain. Is this being borne out in current business?

Attrell disagrees: “We have not noticed any affect on the amount of business coming through the door, or with any current clients getting cold feet and withdrawing from their purchase. The Spanish property market is well established and we've always maintained the market should be viewed as a long-term investment and not short-term. For example, one client who bought a property for £282,000 two years ago has seen an increase in value of £13,000 over the period, which is positive but perhaps below expectation. Short-term investment is generally associated with new and emerging markets such as Bulgaria or Turkey.”

"Spain will continue to experience property problems in areas that have been exposed to corrupt licensing laws and where there are 'land grab' issues. However, it is our opinion that generally speaking property will continue to increase in value over the long-term, Spain is not a high-risk market."

Spanish mortgages
For those undeterred by stock market fluctuations, arranging a Spanish mortgage is a relatively easy process, and safe if prudent precautions are undertaken.

Securing a loan against the property with a bank or financial organisation in Spain itself has the major advantage over funding from either savings or cash raised against a property in the UK, in that the lender will do its own checks on the property. This ensures a proper legal title exists, that the property is registered in the buyer’s name and that a valuation of the property takes place to check other issues such as proper planning permissions or building licences etc. are correct.

An increasing number of buyers are using local Spanish lenders as opposed to UK lenders. Probably the main reason for this is that mortgage interest rates are generally lower. For example, Euro mortgages can be found with interest rates from as low as 4.60%.

The types of mortgages available from Spanish lenders are similar to those offered by UK banks. There are a variety of interest rates available and these rates can be fixed or variable. The interest rate payable for each mortgage is usually driven by how much of a loan is required compared to the value of the property. Generally speaking, the bigger the deposit a buyer has to put down on a property means they will have access to more competitive mortgage deals

Eligibility for a mortgage secured on a property in Spain
When applying for a mortgage in Spain, an application is completed and submitted to the lender. Supporting documents will need to be submitted such as proof of income. For people who are employed, copies of three months payslips and the most recent P60 is required. An employer’s reference and copies of six months personal bank statements are also needed. For self-employed applicants, copies of the last three years audited accounts, a year’s worth of business bank statements and six months personal bank account statements are required.

The loan is based on joint net “take home” pay and is calculated on an affordability basis. All existing liabilities including any mortgage or rent payments, personal and bank loans and any maintenance payments (i.e. divorce), together with the proposed Spanish mortgage payments must not exceed 35% of net monthly income.

For example, if the net joint monthly income is £2,500, multiply this by 35% (£875), minus an existing monthly mortgage payment of £300 with no other liabilities, leaves a balance of £575 for the proposed Spanish Mortgage payment.

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