QSD Group

Have house prices in Spain touched bottom?

2010-03-16T12:07:00.002+01:00

Official statistics in Spain regarding house prices published by the INE (National Institute of Statistics) show falls in prices of around 11% since the start of the crisis. A figure clearly lower than the variation experienced in countries such as the USA and United Kingdom, which have also suffered their own property crises.

There are various reasons which have caused Spain, as a country, to see a less rapid fall in prices than other countries:

Slowness in the legal system which guarantees mortgage foreclosures.
The banks’ unwillingness to show the real value of the properties they are hoarding on their balance sheets (or those of their subsidiary companies).
Low interest rates, which have given significant respite to many people with mortgages signed 30 or 40 years ago.
The system of unemployment subsidies and family support for the unemployed.

In any case, like almost all statistics, the INE statistics show average values for all types of properties in all locations. If we analyse the situation province by province, and area by area, we can see that there are certain types of properties and areas where the fall has been much greater. In particular, in the Mediterranean area it is not uncommon to see holiday home developments in coastal areas which have lowered their prices by between 25% and 35%. It should be no surprise that in these areas the stock has diminished radically and, now that there is beginning to be a shortage of some types of properties, we are starting to see a slight rise in prices.

Most experts are forecasting a greater adjustment in prices of around an additional 10% or 15%, an evaluation with which I might agree, but bearing in mind that once again we are talking of average values for the whole of Spain. Those areas where the price has already fallen by 25% to 35%, and where the number of sales has notably improved, will not suffer new falls, but may even see small increases.

Positives and negatives of the Spanish banking system

2009-12-15T12:24:00.006+01:00

Until a year ago Spanish banking was internationally extolled as one of the world’s soundest systems. The strict control of the Bank of Spain, which required higher provisions (deposits to cover certain risks) than other countries, together with a fast growing, dynamic economy such as Spain’s, enabled the system to grow solidly. Banco Santander and BBVA are the world’s largest banks, with investments in South America, USA and China. Year after year, almost all the financial institutions obtained record profits. But lately concerns have been raised regarding the solvency of the system and 2010 looks set to be an extremely difficult year for Spanish banks. Could these critics be right? What has happened?

The feeling was that the US sub-prime mortgage crisis would scarcely affect Spanish investors, who were more conservative than those in other countries. The so-called “toxic assets” did not represent a significant problem for the Spanish system. However, the credit expansion in Spain, which was the result of the housing boom, together with a negative balance of trade, meant that Spanish banks were forced to obtain the money required to finance this credit on the international market. When the sub-prime crisis exploded, the world financial system reduced loans to a minimum. Due to lack of confidence, all the banks wanted to recover their loans and would not consider renewing them, resulting in Spanish banks having to face numerous debt maturities with foreign banks in 2009 and 2010. This caused a reduction in availability of loans for companies and private individuals as the banks main concern was to repay their own loans to foreign banks. But unlike other countries the provision of public funds to rescue Spanish banks was minimum. Credit did not flow, but the system remained sound.

So why are there concerns regarding the solvency of Spanish banks in 2010? Payment defaults. With unemployment of around 20% and after a real estate crisis, both private individuals and developers are increasingly unable to meet loans. But once again we must thank the Bank of Spain for its supervisory work in previous years. The provisions made by Spanish banks against defaults are the highest in the world (much was learnt from the previous crisis at the beginning of the 90s), and there is a high percentage of real guarantees (properties) for most of the loans. The banks will have to hold on to many properties and sell them, and the smaller banks, and especially the Savings Banks, will have to merge. In 2010 some institutions will experience specific problems, but the solvency and security of deposits is guaranteed.

Have prices started to rise?

2009-10-01T09:32:00.002+02:00

In recent months we have seen how some of the “star” promotions sold by QSD Group are on sale for higher prices than in the past. El Bosque, the spectacular apartment complex at Punta Prima, has seen starting sale prices increase from 97,000 euros to 115,000 euros. The Rocío complex of high quality town houses in Villamartín, has seen starting prices rise from 99,000 euros to 109,000 euros, and there are many more examples like these. Does this mean that prices have gone up?
Although it may appear so, this is not the case. The explanation is very simple. When house prices on the Spanish coasts crashed a year ago, there was a general fall in prices of, in some cases, as high as 30%. At the time a same promotion included some more expensive properties and other cheaper ones, depending on location, views or surface area. As prices in general fell, the value of all properties decreased by a particular percentage, which meant that there were still homes at different prices in each project. The first to sell were the cheaper ones, which means that when we look at the homes on offer in some promotions it seems as if prices are going up, because the “starting price”, that is the price of the cheapest property on the list is higher than at the beginning of the crisis. So when these projects are listed on the internet in a commercial file, it gives the impression that prices are rising when if fact what has happened is that the homes which cost less have already been sold.
What we can say is that, while prices are not going up, what is happening is that the cheaper properties are selling fairly fast, leaving the more expensive units pending sale for the moment. Also, these houses still pending sale are the best, not for nothing were they the most expensive, and they still represent a good buy as the reduction percentage in their price is the same as that of the cheaper properties.

Does the Banks’ Real Estate Offer represent a Great Opportunity or a Great Disappointment?

2009-07-16T18:00:00.005+02:00

It has been reported in the newspapers, on the radio and on television: Due to the crisis Spanish banks are repossessing thousands of properties from developers and private individuals. Even that know-all cousin or brother-in law that every family has is telling us the same thing:

— Spanish banks have become genuine real estate companies and have the best offers, wait and see. —They tell us with undying conviction during a family lunch.

But some have already started to discover that this is not entirely true.

If prices had not fallen as they have, it would be true that the banks’ offer would be excellent, as they are generally awarded properties for an amount similar to the sum owed (which ranges from between 70% and 80% of the appraisal value). That is, they could offer properties at prices 20% or 30% cheaper than the market value. It is a pity that in any case this market value has fallen by 30%. The people who have lost their homes or have not been able to sell them are those who owed large amounts to the bank, as otherwise they would have sold at any price before losing the property instead of getting nothing. This means that the banks have to recover the loan, late payment interests, legal expenses, etc. when they sell. In short, the prices at which they offer their properties are no bargain.

— Bah!, the banks are bound to sell at a loss. That is where the opportunities will be. —That’s what our clever brother-in-law tells us, in an attempt to settle the matter.

Sure, but the bank’s main concern is not to sell the property quickly, but rather not to allow their profit and loss account to deteriorate, not to show losses to their shareholders. That means that banks prefer to keep the property as part of their assets, without showing an immediate loss due to its sale. Each year they will make a provision for part of the value of the property, and so distribute the potential loss over time, and then yes, in the 4th or 5th year they may sell the property at a large discount without showing great losses in that financial year. This is a logical strategy for diluting the fierce impact of the crisis over a number of years, and it is also possible that the real estate market may recover meaning they could sell at a better price.

That is why we can sit back and wait for the banks’ fabulous offers, because they are not going to come. Generally speaking, the best offers will be those available before the bank is awarded the property as the high expenses involved in a legal repossession process will not yet have been incurred. I suggest that you check for yourselves on their webpages.

When Will We See a Recovery in Spain?

2009-05-29T13:34:00.002+02:00

It is clear that we are facing a world crisis. That this crisis is affecting different countries to different degrees is also clear. No-one can ignore the fact that the impact on Spain has been tremendous. The fall in GDP is similar to that of Britain or Germany, but unemployment is increasing much faster. A number of analysts forecast that Spain will find it much harder to recover than other neighbouring countries. Are they right?

Nobody can say, but if I were to make a prediction, which is why I am writing this post, I would say they are wrong. Spain will recover at a good rate. There are two key factors which some experts resort to with regards to the Spanish model to support the argument that Spain will experience more problems than other countries:

1. High unemployment, which can drag down domestic consumption.

2. The excessive stock of unsold properties.

With regards to real estate, if you have followed my previous posts you will know that thanks to the fall in prices the stock will quickly be reduced. This month QSD Group is heading towards record sales, and our company is not alone.

As for unemployment, while this is a tragedy for many families, it represents a means of rapid adjustment for increasing the country’s productivity, less people to do the same work. For many years it has been said that Spain’s greatest problem was low productivity in comparison with other similar economies. Clearly, this way of increasing productivity is the most painful of all. But Spain has something which other countries have lost: family, a powerful social network which helps and protects those people looking for a new job right now. That is why social conflict is so low in our country. If France had our level of unemployment the Champs-Élysées would already have been burned down.

The great challenge will be to create jobs for all these new unemployed. But the Spanish economy, and in particular its small and medium businesses, have always shown an admirable entrepreneurial capacity.

Let’s hope I am not wrong...

It Seems Hard to Believe

2009-03-04T13:05:00.005+01:00

I was surprised when I saw the date on which I was starting to write this new post. It has taken me almost three months to find time for the new Newsletter. Have we been so busy at QSD Group? The answer is yes, although it may seem hard to believe.We sincerely expected December and January to be poor in terms of sales and contacts, but they have not been bad months. And February has been an extremely good month. Aren’t we supposed to be experiencing the worst financial crisis since the Second World War with no one in Spain selling a single apartment? Well it seems that this is not the case.

These are hard times for property developers, but now that they have all accepted that prices must necessarily fall, more and more sales operations are beginning to be carried out. This is good for the agencies which managed to survive the extremely tough year of 2008.

Talking to our product manager the other day, we reached the conclusion that in 3 or 4 months we might have a problem of a shortage of interesting properties for sale, as the great bargains are selling very fast. We must all make an effort to include other developments in our product portfolio.

Keep an eye on the contents of our web page and the newsletters, because if I am not mistaken we will soon see extremely interesting new properties.

A strange Christmas

2008-12-15T12:34:00.002+01:00

Christmas is here and this year it arrives in the midst of a strange financial and economic crisis. We have not experienced a period of adjustment as severe as this for many years and this means that for many families this will not be such a happy Christmas. In previous years the real estate sector saw a wealth of lavish company dinners and Christmas gifts. This year things are very different and austerity is the name of the game for companies which are managing to survive the crisis but, as always, the Christmas spirit is still here as this special time of the year comes round once again.

At this point in the crisis everyone has adapted to the new situation: families have cut back on spending, governments are injecting public money into the economy, companies have reduced their budgets and cut down on staff, and developers have significantly lowered property prices.
Many constructors are launching special offers until the end of the year and I invite you to visit our web page to see our proposals. Perhaps this is the time to “treat yourself" to a home on the Spanish coast.

Although the situation is more difficult for some, many others are still able to enjoy a good lifestyle, and we should not allow pessimism to become widespread and put a stop to all economic activity. All situations come to an end and, although it may be a cliché, the economy is cyclical. Just like Christmas.

Happy holidays to you all.

A small respite

2008-10-27T17:07:00.004+01:00

The international financial sector has seen weeks of continuous upheavals: US, British, Belgium and German banks and insurance companies on the verge of bankruptcy, one country’s financial system in meltdown (Iceland), stock exchanges at record lows, all European governments launching economic intervention plans even more ambitious than the Bush Plan. Each day has brought a new surprise.

At last it seems that the joint effort of all these governments has restored faith in the system and, if all goes well, it should soon recover some liquidity.

Will this have an effect on Spain’s housing market? In my opinion, it will.

There are two main causes for the current problem of the Spanish housing market: Continuous price rises which have caused what is known as a "bubble" and a financing problem which is the result of the international financial crisis. The shortage of financing caused by a lack of liquidity on the interbank market also has two effects: financial problems for developers who cannot finance the stock they have accumulated, and difficulties in accessing loans by end customers. Both situations inevitably lead to the fall in prices we are currently experiencing.

If the intervention measures approved (injections of liquidity, purchase of assets by States, acquisition of holdings in banks with problems, government guarantees of interbank loans) achieve their goal, part of Spain’s house sales problem will have been resolved. Because developers will be able to refinance their debt more easily. And because buyers will once again have access to credit under more or less normal conditions. Never again will we see the excesses of the past, but at least the “short circuit” that has occurred in the housing market will be repaired.

Without doubt, the negative effect for buyers will be the following: as the credit situation returns to normality, the dramatic falls in house prices we have seen in the last 5 months will level off. There will be less pressure on developers to sell and so the continuous drop in prices will lose pace. What is true is that, given the excess stock on the Spanish market, even if prices do not drop any further they will remain at current levels for some time.

A Good Example

2008-09-24T11:35:00.010+02:00

A number of real estate colleagues were very critical about my views on the necessity of lowering prices in order to end this crisis. I understand that no one wants to earn less money or even sell at a loss, but I’m still convinced it’s the only way to get out of the current situation.

I’ll give you an example. The Al-Andalus resort in Almería was extremely successful right from the start, but because of the crisis found itself with various unsold units.

What did the developer do to get out of this situation? He lowered the prices. And it worked: sales increased again.

There will always be people who are interested in buying property such as Al Andalus, a resort renowned for its high quality, location and communal zones. At the right price (set down by the law of demand and supply) they are selling lots of properties, many of them with QSD.

The combination of a good product and an incredible price has made it possible to sell real estate when no-one else is.

Those who don’t believe me, should watch the little video attached to this message and imagine the number of people who would be interested in a good product at an excellent price. If the majority of real estate promoters would follow this example and lower their prices, the amount of unsold units would quickly decrease. It is better to lose some money over a short period of time and then to quickly get on top of the situation, than to find ourselves in a prolonged state of agony.

A fast reaction

2008-07-15T09:43:00.001+02:00

The real estate crisis was upon us faster and with more strength than anyone could have imagined. With each new article I write, I’m surprised by the amount of new negative data. The excess stock of built property and the financial crisis are damaging our industry, with sales falling dramatically in certain areas.

The result: companies in danger of bankruptcy, an increase in unemployment, a loss of consumer confidence, a fall in consumption.
The real estate companies´ swift reaction has pleasantly surprised me. Instead of timidly waiting for the problems to pass and moderately lowering prices, many have reduced them drastically (up to 30% in some cases!). They are aware of the fact that the sooner they sell excess stock, the quicker we will overcome this crisis.
Logically, the real beneficiary will be the buyer.

It´s a common idea among economists: the faster the fall towards the crisis, the shorter in time its consequences will be. The fall in sales has been so abrupt, that real estate companies have decided to immediately drastically lower their prices. No negotiations, just the lowest price possible (even with losses) in order to sell the properties as soon as possible. This attitude is proof of an understanding of the situation that goes beyond complaining about the consequences of the crisis or the fall in demand of European buyers.

During a few months there were still a lot of offers trying to hide the fact that prices were falling: e.g. gift cheques, e.g. mortgage paid for the first year, to name just a couple.
Fortunately, these measures were soon replaced by a drastic reduction in prices. According to classic economics, that is one of the best ways for supply and demand to come closer to each other.
And when that occurs, we will have ended the crisis, at least in real estate.

A Necessary Adjustment

2008-05-28T17:14:00.004+02:00

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.

In times of crisis…

2008-04-29T09:30:00.001+02:00

It can seem difficult to be optimistic about our business. The markets have crashed, the bubble has burst, the cycle has reached bottom, the financial crisis, the devalued pound, Spain is sinking under the waters of climate change. All clearly exaggerations, but undeniably ideas which make their mark on our buyers’ subconscious. Nobody is buying property in Spain any more. Or maybe they are?

This is an excellent year for buying a property in Spain and I will now try to explain why at QSD Group we are convinced that this is the case.

Firstly, we should be realistic and analyze the arguments of those who are so negative about the Spanish real estate market individually:

Prices in Spain have stabilized (it is extremely unlikely that they will experience any significant decrease in the areas most popular with our clients), but this is not necessarily bad news. It is bad news for the speculators, those who seek to obtain fast, easy profits, who will just as happily invest in a house in Spain as in any other country or in any other profitable option. For some time now Spain has ceased to represent a good market for this type of client. Our current buyers want to enjoy their home and their lifestyle in Spain. In any case, if we take a look at the historical data, in the long term property in Spain is always a safe, profitable investment.

The financial crisis is also affecting Spain. True, but only up to a point. Spain’s financial system has not been as seriously affected by the US sub-prime mortgage crisis as that of other countries. This is because the Spanish banking sector is traditionally extremely conservative with regards to the levels of risk assumed when granting mortgages. The banking system is in excellent health, with almost all entities showing indisputable profits (banks earned 19.72% more in 2007). Without doubt the international liquidity crisis will mean that mortgages will be analyzed more carefully, and the maximum loan percentages will be reduced to 70%, but this does not really affect foreign buyers who usually provide a significant volume of savings for their purchase.

The pound is low against the Euro. This is a fact. A property paid for in full now costs more in pounds than before. And this is where the key lies, not to pay for it cash. At QSD Group we are advising clients to keep part of their funds in pounds, earning a good interest rate, and to finance 50% of the value of their home with a Spanish mortgage in euros. This mitigates the immediate impact of the fall in the pound, and if the situation changes, which will happen sooner or later, they can then exchange their pounds for euros and cancel the mortgage in euros. If, on the other hand, buyers choose to wait for a better exchange rate instead of buying now, they may find that there is less to choose from later on and property prices in Spain may have gone up again. No-one can have it all.

The climate change represents a danger to properties on the coast. No comment. It would be funny if it were not for the fact that statements like this have caused serious problems to developers in areas such as La Manga del Mar Menor. A great example of “scientific accuracy” sponsored by campaigns like Al Gore’s, fantastic businesses based on predicting the Apocalypses.

In short, I do not deny that the circumstances of the market have changed, but I refuse to accept that properties cannot be sold or bought in Spain. Indeed, I believe that it will be some time before we again see the kind of opportunities available to us this year in Spain.