Spanish transactions rising, thanks to foreign buyers
Last Updated: August 12, 2015
Spanish house prices dropped 3.56% during the year to end-June 2015 (-3.56% inflation-adjusted), up from the 3.03% y-o-y decline in May 2014 and almost the same as the 3.57% annual drop seen in the previous month, based on figures from TINSA. Quarter-on-quarter, house prices fell by 0.7% (-2.2% inflation-adjusted) during the latest quarter.
On the other hand, the Bank of Spain released more optimistic house price figures. During the year to end-Q1 2015, Spanish house prices dropped slightly by 0.1% (but increased 0.94% when adjusted for inflation). In a quarterly basis, house prices fell by 0.36% (but rose by 1.35% inflation-adjusted) in Q1 2015.
Spanish house prices have been falling for seven consecutive years, with a total decline of 41.2% (46.5% inflation-adjusted) from the values reached in Q4 2007, before the crisis. There have been 31 consecutive quarters of y-o-y declines:
- In 2008, Spanish house prices fell 8.75% (-10.05% inflation-adjusted)
- In 2009, house prices fell 6.57% (-7.23% inflation-adjusted)
- In 2010, house prices fell 3.85% (-6.67% inflation-adjusted)
- In 2011, house prices fell 8.17% (-10.28% inflation-adjusted)
- In 2012, house prices fell 11.34% (-13.82% inflation-adjusted)
- In 2013, house prices fell 9.19% (-9.44% inflation-adjusted)
- In 2014, house prices fell 2.96% (-1.96% inflation-adjusted)
The national figures conceal regional house price movements. Most regions are showing remarkable improvement while others remain depressed.
During the year to Q2 2015:
- In the Capital and Large Cities, house prices dropped 2.65%, a sharp improvement from annual declines of 4.84% in Q2 2014, 11.55% in Q2 2013, and 13.53% in Q2 2012
- In Metropolitan Areas, house prices dropped 4.88%, from annual declines of 2.96% in Q2 2014, 12.72% in Q2 2013, and 11.64% in Q2 2012
- On the Mediterranean Coast, house prices dropped 3.13%, an improvement from annual declines of 7.16% in Q2 2014, 7.44% in Q2 2013, and 13.33% in Q2 2012
- In Balearic and Canary Islands, house prices rose slightly by 0.15%, up from annual increase of 0.07% in Q2 2014, and in contrast with y-o-y declines of 3.74% in Q2 2013, and 6.78% in Q2 2012
- In Other Municipalities, house prices fell by 5.53%, worse than the y-o-y drop fo just 0.14% in Q2 2014, but an improvement from annual declines of 11.49% in Q2 2013, and 7.36% in Q2 2012
Residential property transactions rose by 17% to a total of 30,578 units in June 2015 from the same period last year, its tenth consecutive month of annual rises, according to the Instituto Nacional de Estadistica (INE). The increase in home sales was mainly driven by the rise in existing home purchases.
This improvement in property transactions is mainly driven by foreign property buyers, buying luxury homes on the coast and in cities like Barcelona and in Costa del Sol, one of the country’s most popular areas with overseas purchasers.
“Buyers are realizing the market has hit rock bottom,” said Rachel Haslam of real estate agency Lucas Fox. “This situation has led to an increase in buying activity but we still have not noticed the increase in prices,” said Damian Pena of Engel and Volkers. “The logical tendency is that the prices will start to rise next year,” he added.
Britons accounted for 15% of all sales to overseas investors, followed by the French (10%), Russians (9%), and Belgians (7%), according to Spain’s society of property registrars. There is also an uptick in interest from U.S. buyers, with the dollar strengthening against the euro.
The total number of foreclosures also fell by 6.5% to 17,786 dwellings in Q1 2015 from the same period last year, based on figures from the INE.
The Spanish property market is expected to continue stabilizing for the remaining months of the year. “With unemployment falling, the economy growing faster than predicted and property reaching the bottom, 2015 is set to be a pivotal year for Spain's property market. Prices are on average 40% below what they were since the start of the crisis in 2007 and we predict a slow and steady recovery,” said Alexander Vaughan of real estate agency Lucas Fox.
In Q2 2015, the Spanish economy expanded by 3.1% from a year earlier, up from an annual real GDP growth rate of 2.7% in the previous quarter and the biggest expansion since Q4 2007, according to the preliminary data released by the INE. The economy is expected to grow by 3.1% this year and by another 2.5% in 2016, up from a growth of 1.4% last year, and contractions of 1.2% in 2013, 2.1% in 2012 and 0.6% in 2011, according to the Bank of Spain.
Spanish rental yields recovering
Gross rental yields on property in Spain are slowly recovering. They are still not high enough to make buying an apartment attractive from the yields perspective, but they are a little better than they were previously.
The gross rental yield for apartments in Barcelona ranges from 3.80% to 4.70%, whereas in the centre of Madrid, rental yields are better, ranging from 3.91% to 4.92%. In Madrid-suburbs, rental yields range from 4.11% to 4.87%.
Prices per square metre (sq. m.) of apartments in Barcelona range from around EUR 3,300 to EUR 4,100. In the heart of Madrid, i.e., Chamartín, Chamberí, Retiro and Salamanca, prices per sq. m. range from around EUR 3,400 to EUR 3,800. In nearby upscale suburbs of Madrid such as Las Rozas, Majadahonda and Pozuelo de Alarcón, apartments are cheaper, with prices per sq. m. ranging from around EUR 2,600 to EUR 2,700.
The centre of Madrid fetches the highest rents per sq. m. Apartments here cost around EUR 11 to EUR to EUR 14 per sq. m. to rent per month or the equivalent monthly rental income of around EUR 970 for a 75-sq. m. apartment.
Apartments in the suburbs of Madrid cost around EUR 9 to EUR 11 per sq. m. to rent per month or the equivalent monthly rental income of around EUR 1,100 for a 120-sq.m. apartment to around EUR 2,300 for a 250-sq. m. apartment.
In Barcelona, rents per sq. m. per month range from around EUR 11 to EUR 14 or the equivalent monthly rental income of around EUR 950 for a 85-sq. m. apartment, to around EUR 2,300 for a 200-sq.m. apartment.
When buying property, take into consideration that round-trip transaction costs are moderate to high in Spain. See our Property transaction costs analysis in Spain and Residential property transaction costs in Spain, compared to the rest of Europe.
Taxes are high in Spain
Rental Income: All property owners are subject to a flat tax of 24.75% on gross rental income for 2012 and 2013.
Property and Wealth: A special annual 3% tax is levied on the cadastral value of real estate owned by nonresidents.
Capital Gains: Capital gains tax realized by nonresidents are subject to flat rate of 20%.
Inheritance: Each beneficiary’s inheritance is taxed at progressive rates, from 7.65% to 34%, after certain tax-free amounts have been deducted.
Residents: Resident individuals are liable to tax on their worldwide income and assets at progressive rates, from 24.75% to 52% for 2012 and 2013.
Total transaction costs are moderate in Spain
The total roundtrip transaction cost is around 9.50% to 15%. This includes the Property Transfer Tax, which varies from 6% to 10% depending on the autonomous region, and the real estate agent’s commission, which is around 2.5% to 3%.
For new properties, Value Added Tax, plus stamp duty, is imposed instead of property transfer tax.
Law and slow courts benefit tenants
Spain’s rental market is extremely pro-tenant.
Rent Control: The landlord and tenant have the contractual freedom to fix the rent and state the due date of payment. However, rent increases are tied to the Consumer Price Index and limited to once a year.
Tenant Security: The 1994 Urban Tenancy Act aimed to restore balance between the interest of landlords and tenants. It failed. Tenants are guaranteed tenure for five years. Courts are painfully slow in resolving cases of tenant eviction and compensation for rental arrears and damages.
Spain’s long-awaited economic recoverySpain’s economy started to recover in 2014, with real GDP expanding by 1.4%, based on figures from the International Monetary Fund (IMF). In fact in January 23, 2014, Spain became the second euro zone country to exit its international bailout program, after Ireland. In Q2 2015, the Spanish economy expanded by 3.1% from a year earlier, up from an annual real GDP growth rate of 2.7% in the previous quarter and the biggest expansion since Q4 2007, according to the preliminary data released by the INE.
It has been a long, hard slog. Recession has been Spain’s normal condition for years. In 2013, the economy shrank by 1.2%, according to the IMF, and by 1.6% in 2012. In 2011, the economy grew 0.5%, but there were annual declines of 0.2% in 2010, and 3.8% in 2009.
The economy is expected to grow by 3.1% this year and by another 2.5% in 2016, up from a growth of 1.4% last year, and contractions of 1.2% in 2013, 2.1% in 2012 and 0.6% in 2011, according to the Bank of Spain.
Spain’s economy was fuelled by property during the boom decade from 1997 to 2007, when it grew by 3.8% each year. The building frenzy spread to all parts of Spain and ignited a crazy optimism, supported by cheap mortgage credit and by an unbelievable surge in residential construction. At the height of the housing boom in 2007, housing investment was no less than 7.5% of Spain’s GDP, significantly above the OECD average. The construction industry became a key employer of low-skilled workers. The increase in construction activity helped pull unemployment down from 24% in 1994, to 8.3% in 2007. Then the economy plunged into recession in late 2008 and had been down for several years since then.
With the situation reversed, Spanish unemployment now stands at 22.5% in June 2015, down from 24.5% from the previous year but still among the highest in the OECD and more than twice the euro area average of 11.1%. There were about 4.23 million unemployed persons in Spain in June 2015. The country’s overall unemployment rate is expected to fall further to 21.1% at the end of 2015, according to government estimates.
In June 2015, Spain’s inflation was 0%, unchanged from a year ago but up from 11 consecutive months of falling consumer prices, according to INE. The country’s inflation rate is expected at -0.6% this year and 1.1% next year, according to the European Commission.
Spain narrowed its budget deficit last year to 5.8% of GDP, significantly down from 7% in 2013 but remained the second highest deficit (by percentage of GDP) in the EU, behind Cyprus, according to Eurostat. The deficit is projected to fall to 4.5% of GDP next year and to 3.5% 0f GDP in 2016.
Spain’s overall debt reached more than EUR1 trillion last year – about 97.7% of GDP. It is expected to increase further to 100.4% of GDP this year and to 101.4% of GDP in 2016.