Spanish estate agents and other vested interests (including government ministers) have recently been coming out the woodwork and telling us that now is a good time to buy property in Spain. I disagree. Here are 10 reasons why buying in Spain is not a good idea right now:
Poor build quality
Most of the property that was built during the boom years in Spain is of very poor build quality. This is especially so in the coastal areas that fueled the boom. There are exceptions but I doubt there are many. Some of the urbanisations in our area that were completed in the last few years initially looked to be of good quality. Then after a couple of winters with the heavy rains that inevitably arrive after Christmas, even these urbanisations are looking worse for wear, with extensive damp and water damage. I guess the developers thought they could get away with not damp proofing properties. I suppose a lot of holiday home buyers didn't realise that Spain gets a lot of heavy rain in the winter. Even on the so-called Costa del Sol...
There's between 1 million and 1.6 million unsold properties in Spain
Depending on which newspaper you read, there are apparently between 1 million and 1.6 million unsold properties in Spain, with a lot of this stock concentrated in the coastal areas of Spain. Amazingly, they are still completing properties started during the boom years. There are whole ghost urbanisations dotted around the costas of Spain, with no sign of anyone buying just yet...
The Sterling/Euro exchange rate
If you buy now and the exchange rate goes back towards 1.3 or 1.4 then you will have lost a lot of money if you are a British investor. For example, if you buy an appartment for €150,000 euros, that will cost you the equivalent of £133,928 at a £/€ exchange rate of 1.12. Now, if the exchange rate goes back to 1.3, your property will be worth £115,384. If it goes back to 1.4, then your property would be worth £107,142. This is assuming that the property is still worth €150,000. Obviously this is not an issue if you don't plan to sell any time soon.
Spain leaves the euro
If Spain eventually leaves the euro, your house will be priced in worthless pesetas. Who knows how much it would be worth in sterling or even euro/deutsch mark terms. Spain's new currency would be massively devalued, meaning your property would be massively devalued as well.
Unemployment is 21% in Spain and will continue to stay very high for the forseeable future
Remember that most of the people buying property in Spain are actually Spanish, and with unemployment at over 21%, it's not really going to kick start the property market is it? Your average Spaniard is not going to be thinking about buying a property when he/she is either unemployed or worried about losing their job.
Economic growth to remain very subdued in Spain
The IMF is forecasting that the Spanish economy will grow by just 0.8% in 2011, and then 1½-2 percent in the medium term, which will not be enough to create jobs. So it is doubtful we will see any recovery in the housing market in the near term..
Euroze interest rates are on the increase
The ECB has already raised rates twice in recent months and has signalled further increases are likely. As a result, the euribor, which is used to set the vast majority of mortgage rates in Spain, has been increasing. This will mean more people struggling to pay their mortgages and more reposessions, and ultimately more repossession properties on the market. An increase in exchange rates is the last thing the Spanish economy needs right now.
Spanish banks are not lending
Spanish Banks are not lending because their balance sheets are stuffed full of bad real estate debt and repo properties, so even if you wanted to buy, you are unlikely to get a mortgage from the bank, unless you buy one of their overpriced repossessions. The Spanish banks are desperately trying to raise capital, so they are in no position to restart lending any time soon. Another EOS blogger wrote about his struggle to remortgage recently in a post here:
http://www.eyeonspain.com/blogs/remortgage-refinance/5218/is-anybody-lending-in-spain.aspx
Renting makes sense
Renting gives you more flexbility and is very cheap at the moment. Why get stuck in one place with a property purchase? There are now some fantastic deals on rental properties, especially in the overbuilt coastal areas. In the area we live, which is one of the smaller resorts on the Costa del Sol, there are literally hundreds, if not thousands of properties up for rent. When we first visited 3 years ago, you couldn't get anything for under 600 euros. For 600 euros, you'd maybe get a 2 bed appartment right up in the hills. Now, where we live, you can rent front line beach appartments for 400 euros per month.
We are renting a 3 bed town house for 500 euros per month. We were originally paying 550 per month but I asked my landlord for a discount. I am probably going to ask him for another discount in September when our contract is due to end. There's a 3 bed appartment opposite us that was offered to us recently for 350 euros per month, so we could easily move there if we don't get a discount.
With renting, you also don't have to pay IBI, community fees and any maintenance fees.
Gross Rental yields of 5%, even after big falls in property prices
In the areas I keep an eye on, namely the Western Costa del Sol and Madrid city, gross rental yields (yearly rent divided by the property value x 100) are no better than 5%. That's even after 50% falls in the western Costa del Sol. The problem is that just as property prices have collapsed, rents have collapsed as well, as discussed above. Does a 5% gross rental yield sound like a good deal? It doesn't sound very good to me. Especially when in the UK, I could buy properties with a gross rental yield of 7% or more. The UK has a shortage of property, Spain has a massive oversupply, so why are gross rental yields better in the UK than in Spain. It doesn't make sense.