Spanish Property Crash – The Spanish Property Crisis Explained

The news from Spain, at the moment, is hardly encouraging for those wishing to buy here. Almost daily there are reports of Spanish property developers going bankrupt and Spanish property prices have been sliding for the past two years, with a major downward acceleration occurring over the last few months. However, along with all the problems there are also tremendous opportunities.  But, first, you need to understand the Spanish property market and what has happened.

In fact, the Spanish property crash in Spain has come as little surprise to many observers. Over the past few years Spain has experienced an astonishing economic boom that has been largely driven by property and the huge demand for it. Unfortunately, the boom was uncontrolled and led, in the memorable words of Alan Greenspan (in a different context), to an ‘excess of exuberance’. This, to some extent, was understandable as Spain benefited from a remarkable confluence of property market initiators.

Indeed, crudely, for some ten years Spain had the good fortune to have four different property markets interacting at the same time – all encouraging building and pushing Spanish property prices ever higher until the whole economic edifice became unsustainable.

The first Spanish property market was powered by North Europeans, who generally come to Spain to retire. Their dream was (and remains) remarkably similar, almost irrespective of what they had to spend. Most North Europeans wanted a three bedroom, two bathroom villa with a pool, on a flat plot, within fifteen minutes of the sea. Invariably, these villas did not exist in the past due to historic Spanish land use and had to be newly built to satisfy the liquid wealth that was pouring into the country. Huge, new estates of villas therefore quickly grew up on the outskirts of most coastal towns. 

The second market was the general Spanish property market where there was a demand, from the Spanish themselves, for modern housing to replace the town houses of old. Adosados (semi-detached houses) with their clean lines, garage and light, airy rooms (on the face of it) achieved this objective. Anyone who has been into an unreformed, old town house, within a rabbit warren of impossibly narrow streets, can appreciate how much the Spanish must have revelled in these new style properties.

The third market allowed the Spanish to leave their old town houses and was driven from an initially unexpected quarter – mass immigration, albeit not from wealthy, first world Northern Europe. Immigrants from South America, North and Sub-Saharhan Africa, Bulgaria and Romania poured into the country (at some 700,000 people per year) secure that they could gain employment, ironically, often in the construction industrty. Able to buy only the very cheapest Spanish property, they bought the unreformed town houses and decaying flats of the native Spanish.

Finally, the new wealth of the native Spanish and the holiday desires of North Europeans produced a massive demand for beach apartments. These were almost as important to the Spanish as to North Europeans as, oddly enough, the Spanish dream is represented by owning a beach front apartment.

The net effect was a time of wonder for developers, both big and small. North Europeans were buying everything at the top of the market and the immigrants everything at the bottom of the Spanish property market. This created great wealth and allowed the Spanish themselves to buy into new adosados and modern, flats. Barely constrained by planning regulations, promoters of all sizes built and built – with not a thought to the future.

So great was the frenzy that many native Spanish gave the Spanish property market a further nudge by taking advantage of the building boom to buy into off-plan developments. Paying a small deposit allowed them to gain the opportunity to invest in a new development with the absolute intention of selling their adosado or flat for a profit – prior to completion of the build. Of course, if they misjudged the timing and were unable to sell their investment then they would inherit (in Spanish terms) a huge mortgage that was never intended. And with the purchasing power of the Spanish salary not having changed in ten years this could (and now is) proving ruinous for many.

By the spring of 2008, the ruinous nature of Spanish over-building (some 500,000 new properties per year too many) finally became obvious to everyone. Indeed, it is estimated that by the end of 2008 there will be some 2 million properties for sale. To make matters worse Spain, like the rest of the world, has been hit by the lunacies of the credit crunch, together with the horrors of high oil and consumable prices. The result has been a Spanish property market slump that is likely to last some years.

So, as a potential buyer, what do you do?

Firstly, it is vital to remember that all SpainĀ“s constants – the very reasons for coming here – remain. The country has not moved several hundred miles down the African coast and life should never be delineated soley by the wisdom or otherwise of property investments! The climate in Spain is heavenly and the infrastructure that has developed over the past few years is superb.  

The education and medical care systems are comparable (and often better) than North European countries, travel throughout the land is easy and the Spanish people are as tolerant and welcoming to foreigners as ever. Better still, Spain provides remarkably good value for money and a lifestlye that (according to recently topped the European quality of life index. Property problems or not, Spain remains a marvellous place in which to live.

The Spanish property slump is serious and the consequences should not be minimised. However, in fact, now is the very time to buy here. The desperation of many sellers, both Spanish and international, means that there are some stunning bargain properties to be gained – either for investors who wish to develop a portfolio or those wanting a holiday or retirement home. Indeed, it is when a market is at its most volatile that the brave buyer can really benefit and take advantage of the tremendous opportunities (and bargain properties) that exist when others are panicking.

That said, the line between a volatile, panicking market and one that stabalises can be surprisingly thin. Past experience suggests that the time to buy is when there is still turmoil and fear in the market and whilst genuine bargain properties are still for sale. Delay for too long and you can find that the best opportunities have been snapped up and that sellers have hardened their position and reconciled themselves to not selling until they can obtain the prices they want – even if this means waiting some years.

Already professional investors are starting to buy in Spain, well aware of how property markets work. So, if you are thinking of buying, think yourself lucky that you did not do so a couple of years ago – and take advantage of some of the incredible bargain properties now on offer. You may be rewarded by gaining a wonderful, long term home in a country delivering one of the finest overall lifestyles in the world!