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October 2008

30.10.2008 - Mallorca Property & Mortgage Gloom

 

Property sales in Mallorca and new mortgages in Mallorca continued to fall in August according to the latest data from the Instituto Nacional de Statistica. Mallorca property sales fell by 44% while the number of new mortgages reduced by nearly 50%.

In Spain as a whole property sales transactions fell by 37% (23% in new home sales and 47% in the second hand market)

These falls are blamed almost entirely on the lack of available credit / tightening credit conditions. 

With so much bad news since August the trend of falling sales seems likely to continue adding to the plight of house builders with large amounts of unsold stock, particularly where they have had a highly geared business model. "On the flip side" adds Novi Property's owner David Novi is that good buying opportunities, particularly in the Mallorca new homes sector are starting to emerge.

For further information contact David Novi BA MPhil MRICS at info@novipropertymallorca.com or via www.novipropertymallorca.com

28.10.2008 - Spanish Mortgage Rates

 

Some good news is at least emerging out of the general economic and financial gloom with the Euribor, the main reference rate for Spanish / Mallorca mortgages, continuing it's downward trend of the last fortnight to situate it's self at 4.98%, the first time it has been below 5% since May.

With the president of the ECB strongly indicating that next week should see a further cut in Eurozone interest rates it seems likely that the Bank will use any opportunity to reduce rates in an attempt to boost the dramatic slowdown in the European economy. That said they will also want to remain wary of cutting rates too far and too quickly leaving the authorities without sufficient ammunition to fight future problems at a time of such financial and economic weakness.

With most other variables associated with the Spanish / Mallorca property market remaining so weak this trend in the Euribor will at least provide some relief for existing home owners and for those wishing to take out mortgage finance to fund a purchase, just when some good buying opportunities are starting to emerge. Regarding the latter we are at last seeing, in Mallorca, buying opportunities due in the main to some early distressed sales and general pressure on the new homes sector. In the months ahead we foresee this feeding through to the market more generally as property owners wanting or needing to sell repricing their homes to reflect the new "economic reality".

That said this is only likely to effect a minority (all be it growing) of properties resulting in a market with very wide variations in prices, not all of which will be that obvious. Critical for buyers will be good research, and specifically valuation advice, so that individual buying opportunities can be analysed and an objective view taken prior to any purchase decision.

For further information on the Mallorca property market please contact David Novi BA MPhil MRICS at Novi Property Mallorca (www.novipropertymallorca.com) at info@novipropertymallorca.com

10.10.2008 - Mallorca Property Market Update - 10/10/08

 

At Novi Property Mallorca while we have always tried to bring our clients regular updates on the Mallorca property market and general economic situation, it seems almost impossible, in the current world economic climate, to do so when everything is moving so quickly! What we say today may be very different to what we might conclude tomorrow!

 

That said there is still real value in looking at where we currently stand and what are the likely consequences for the Mallorca residential property sector both now and in the future.

 

While people still want to sell and others still want to buy (and this won't change even if the world economy falls into deep recession or even "depression") we have a "market" and thus issues of pricing and economic returns remain real. We can't all throw our arms in the air, go home and wait for things to get better (it would be a long sabbatical from "life on earth" if we did that!)

 

So what is the current situation and the economic backdrop likely to effect the market? Let's look at some of the basic variables that are, and will be, effecting demand and supply now and in the near term:

 

Demand

 

  • Consumer spending is starting to fall as a result of real factors - consumers have less money in their pockets, due to higher interest rates and mortgages etc and the very stringent tightening of available credit - and psychological factors - all the current uncertainty is making consumers much more conservative when it comes to making large expenditure decisions. All this is likely to feed into the general economy effecting profits, wages, employment etc and thus contribute significantly to the economic slowdown at regional, national and international levels.

 

  • Unemployment is on the rise and likely to rise significantly. Spain already has one of the highest rates in the EU, over 10%, and the result will be significant economic hardship for a very large number of people.

 

  • Interest rates are at historic highs in the Euro zone with the Euribor, main reference rate for Spanish mortgages, rising on an almost daily rate, putting more and more home owners in financial difficulties. While bad debt levels associated with residential mortgages stood at around 0.5% at the beginning of the year the figure is rising past the 3% level and could reach 5% by the end of 2008 early 2009. This is significantly undermining demand and consumer confidence. What will be interesting will be to see the reaction of the main international Central Banks in the weeks ahead and whether, as predicted, we will see the start of concerted cuts in base rates (as we write this the ECB, Federal Reserve, and Bank of England have cut rates by 0.5%). Although much will depend on the impact of these cuts on the key interank lending rates, such as the Euribor (currently remaining on a stubbornly upward trajectory despite the base rate cuts), we suspect this will be one source of comfort in the months ahead, as liquidity and confidence returns to the market.

 

  • Credit squeeze (need we say more!) - the availability of mortgage finance has plummeted while the costs (interest rates and bank margins) soured. Until recently it could have been argued that there was still quite reasonable demand but the major problem was converting this demand into actual transactions due to restrictions on new credit. It seems likely that this underlying demand is now on the wane, due to the wider economic problems, although we would not say it has dried up (anecdotally both Novi Property Mallorca and others operating in the market note ongoing buyer interest even if the approach is ever more cautious and price sensitive).   

 

  • Exchange rates - at least for non euro denominated purchasers the issue of exchange rates is very real. Over the last 6 months we had seen very significant strengthening of the Euro (or weakening of the other currencies depending on your opinion!) against Sterling and the US Dollar. The result was to effectively make any purchase around 15% more expensive. This trend is now reversing and although only time will tell whether this will continue, as many commentators predict, it looks likely that for UK and US buyers (particularly those with "cash") conditions will improve.

 

Supply

 

  • Vendors don't need to sell! This is in fact a real issue in the Mallorca market. A significant % of vendors will sell at the "right"price but otherwise seem happy to sit out the downturn. What will be interesting is to see how many will be prepared, and able, to do this if the length and depth of any recession increases as much as now seems possible.

 

  • The flip side is the number of vendors who do need to sell. Much will depend on what stance the banks take with regard to bad debts and associated repossessions / refinancing packages. Both politically and economically it seems likely that banks will attempt to renegotiate mortgage terms with consumers that run into difficulties, but undoubtedly the number of  properties coming to the market for these reasons will increase in the months ahead.

 

  • While Mallorca is suffering much less than the Spanish Mainland from the "supply overhang" resultant from the unprecedented, and unsustainable, construction boom of the last 5 years, certain sectors of the market (low and mid range apartments and houses for example) are effected. In the last few weeks we have started to see real price competition and cutting amongst hard up developers, particularly in this market segment, with cuts of up to 30%.

 

  • It appears most developers have been quick to turn off the "supply tap" so at least it seems unlikely that the new build supply side will worsen 

 

In summary there are certainly more negative variables than positive, and most importantly a great deal of uncertainty. What seems likely is that the general demand side will weaken further and this will put downward pressure on prices. How far prices will fall is perhaps the key question in every property owner's or purchaser's mind. While one could debate in depth the relationship between different asset classes (property, shares, bonds etc) particularly in relation to pricing, with world stock markets undergoing such significant corrections in pricing (European markets have fallen by over 30% during 2008) and supported by the negative supply and demand variables referred to above, it is very likely that property prices will fall significantly. Falls generally of 30%* during the course of this phase of the economic cycle are likely and as, until recently, owners in Mallorca seemed prepared to try to hold out the downturn, much of this correction in prices is still to come.

 

So what does this mean for potential buyers of Mallorca property, what should they do and who will be the active players?

 

  • "Cash is king". While the credit markets remain under such pressure and with disposable income levels falling cash buyers will be the main players not only because they will have the funds but because they will have the power to negotiate significant price discounts. We believe for these buyers there will be real value opportunities in the months ahead.

 

  • Valuation advice will be critical - While general comments can be applied to the market, absolutely critical in the current market will be quality professional valuation advice if buyers are to ensure they buy at prices that reflect true underlying values.

 

  • New properties - It is likely that there will be greater downward pressure on prices in the new homes market, as developers face increasing cash flow problems and slash prices in the months ahead. In the second hand market we forsee two markets emerging - a real market where prices closely reflect underlying values, and over priced properties where vendors either won't or do not need to significantly reduce asking prices. Reseach / professional advice will be very important in identifying into which market area any partcular property falls.

 

  • We see land values falling offering interesting investment opportunities for developers and individual house builders. With construction contract costs falling, as builders compete for ever decreasing projects, this could be an interesting time to look at this sector of the market.

 

  • Exchange rates -We see improvements for Sterling and US Dollar denominated purchasers of around 10%. Along with falling prices this should make certain well priced properties interesting long term investment opportunities.

 

  • Due dilligene, due dilligence, due dilligence! While this is critical in any market with "desperation levels" rising amongst estate agents and vendors, "hard sell" techniques are on the increase with pressure on buyers to sign reservation and option contracts before full legal due dilligence has been undertaken. Choose a good agent or representative, use an independent lawyer and only sign when the latter completes all searches and other contract enquires.

 

For further comment and opinion please contact David Novi BA MPhil MRICS on david@novipropertymallorca.com   

 

 *Note - Here we refer to "asking prices" not "values". In a rising market there is a tendancy for asking prices to be significantly ahead of values, in the case of the Spanish market, generally some 10%. This differential tends to widen at the start of the downturn as asking prices remain on hold while values fall. As the bottom of the market is reached, characterised by increasing distress levels, asking prices can in many cases equate to underlying values as vendors apply a sense of realism and urgency to attract buyers. We are of the opinion that underlying values will fall by between 15 - 25% in Mallorca. Each case / property however requires individual attention / analysis, as some properties remain totally overpriced while others have seen price adjustments in line with true values in the market.

7.10.2008 - Spanish Wealth Tax Abolished

A little bit of good news for embattled Mallorca property owners and buyers. The Wealth Tax (Impuesto sobre el Patrimonio) payable annually for all properties in Spain has been abolished with effect from the 01/01/08.

Although the tax was never very high (generally under 1,000€ per annum for the average home owner, but higher for higher value properties with low or no mortgages)  its abolition will be welcomed at a time when other costs associated with property ownership in Spain - municipal taxes, mortgage rates etc have been rising significantly.

Owners should discuss the changes with their accountant or "Gestor" to ensure their Spanish tax returns are completed correctly 

3.10.2008 - Spanish Property Price Index

 

The well used phrase "Lies damn lies and statistics" springs to mind when looking at the new Spanish property price index, launched by Spain’s National Institute of Statistics in collaboration with Eurostat,  the EU’s statistics office.

Surprisingly or perhaps best said, incredibly, the index claims that average Spanish property prices fell by just 0.3% over 12 months to the end of June, with resale prices falling 4.9%, and new build prices actually rising by 5.3%. All this against a backdrop of an unprecedented over supply of new properties sitting empty on the Spanish Mainland; thousands of estate agency offices closing; residential developers running into serious difficulties with the banks; mortgage default levels rising; mortgage interest rates at historically high levels; and unemployment the highest in Europe!

Anecdotally most serious commentators concur that values are falling by at least 10% and in some areas with the over supply is most acute, by significantly more. 

In countries such as the UK, Ireland and US, all of whom have gone through similar house price cycles, all indices show sharp falls in value, suggesting that something is clearly wrong with the new index here in Spain.

Unfortunately poor information and statistics has always been the problem for analysts of the Spanish property market and this looks unlikely to change!  

For further advice and comment, with specific reference to the Mallorca property market,  please contact David Novi BA MPhil MRICS (david@novipropertymallorca.com). See also www.novipropertymallorca.com)  

2.10.2008 - Mallorca Property Still Too Expensive

Property in Mallorca is completely outside the reach of young fist time buyers in Mallorca according to the latest figures from Observatorio Joven de Vivienda en España despite recent falls in property values.

A monthly salary of 3,300€ would be needed, compared to the current average of 1,182€, in order to not exceed the usual debt repayment to income maximum ratio of 30%. 

At these levels it is hard to see how even a very serious correction in property prices will allow first time buyers to get on to the property ladder. Politicians thus have a serious responsibility to increase the of Affordable Housing  provision in Mallorca, and to deregulate the residential property rental sector, incentivising owners to release units on to the market thus at least providing youngsters with an alternative source of decent housing. 

Story provided by Mallorca Property News (www.mallorcapropertynews.com)

 

2.10.2008 - Spanish New Property Licences Plummet

According to new Spanish Government figures the number of Licences granted for new residential property in Spain fell by 58% in the first 7 months of 2008 when compared with the same period last year.

With developers facing ever increasing problems of liquidity as a result of falling sales, higher interest rates and tighter lending restrictions, new projects are being placed on the "back burners".

Story supplied by Mallorca Property News (www.mallorcapropertynews.com)