It is a fact no one denies. The adjustment in the Spanish real estate market was necessary. Necessary in order to reduce the market price of land. Necessary for the health of the Spanish economy, which could not remain dependent on one sector. Necessary to boost the country’s other productive sectors. Necessary for a democratic revival in those town councils which have been funded by construction licenses (and in some cases by other agreements with a clear lack of transparency). Necessary so that Spain can tackle once and for all the issue of conservation of its environment and coasts.
What is not good, and could not be predicted, is the abruptness of this adjustment. In the first quarter of 2008 some of Spain’s leading real estate companies saw sales fall by 70% in comparison with the same period in 2007. For some, the adjustment has come to represent a serious threat to their business project.
What factors have contributed to this abruptness? In my opinion, the following:
- The global financial crisis. Although Spain has scarcely been affected by the credit crisis sparked by US sub-prime mortgages, the lack of liquidity on the markets is causing Spanish banks to be much more conservative with regards to developers and private individuals. If the end customers cannot raise financing, sales will clearly fall. A drop in sales brings about an increase in the stock of properties on the market and logically prices fall. As prices fall, evaluators update the market values they had proposed to the banks, resulting in an even greater reduction in the amount customers can borrow from the bank. And so sales fall again, creating a vicious circle. Without doubt the combination of a high offer of properties in Spain and the international credit crisis is the main cause of this severe adjustment in the level of sales.
- Pressure from some foreign media. A small group of journalists (no more than 5 or 6) have systematically criticised some aspects of the Spanish real estate market. Sensationalist articles, often with no real basis, which leave an entire sector with not chance to defend itself. Individual initiatives or an organised campaign? There is some doubt within a number of Spanish forums. Very possibly European governments did not favourably view the mass exodus of taxpayers to other countries, in particular Spain. Many people who buy properties in Spain become tax residents, which means that their taxes go to the Spanish government, while they continue to receive benefits or pensions in their home countries. We will never be able to confirm this suspicion, as any action of this kind by a government would breach the most fundamental agreements of the European Union with regards to free movement of people and capital. Anyone residing in Spain, whether Spanish or foreign, can confirm that the horror stories being published are either exaggerations or simply false. Bulldozers are not pulling down houses, organised crime is not rife in residential estates, the government does not expropriate the houses of poor, defenceless buyers. But someone is interested in spreading these stories.
- Internal political battles in Spain. The political parties are attacking one another using town planning as a weapon. They are encouraging these attacks even in public forums like the European parliament, not in order to improve town planning, but to obtain political advantages and to change regional voting trends. The political classes are clearly not rising to the occasion.
In any crisis, someone is always a winner. Who will take advantage of this adjustment? Without doubt, the buyers. In these difficult times the real estate companies face, it is the most astute buyers who will benefit, those who buy when the best opportunities arise. A basic rule for any investor is to buy when prices are low and sell when they are high. And, of course, to buy what you can afford. Simple common sense. The buyers with the most available cash to invest will be those who dominate the market over the next two years as they will not be dependent on the credit companies and will benefit from the best offers.
