Property Market Sentiment Falls while Developers Find Techniques to Stave off a Price Collapse

Published on 02/06/2008 in Investing in Spanish Property

Property crash in SpainThe PIMS Index of Property Market Sentiment has fallen from 2.2 in March to 1 in May 2008.

In the space of two months the Index of Market Sentiment, published by Property Investment Management Spain, has fallen from 2.2 to 1. This is a drop of over 50% and indicates a significant shift in market sentiment. The most optimistic score is 4 and the most pessimistic score is 0. So the market is considerably more pessimistic now than it was two months ago.

The facts tell us that transactions are down 40% compared with February 2007 and that sales are 60% down compared with September 2007. Prices have come down but they haven't collapsed. Why not?

One of the reasons is how the government and developers are responding to these conditions. The government has announced tax concessions and other measures to encourage lettings. Developers are taking advantage of these and introducing "rent with an option to buy schemes". The occupier rents the property with an option to buy at a date in the future at a price which is fixed now. If they take up the option the amount they have paid in rent between now and then is discounted from the purchase price.

This matches the purchaser's needs with vendor's needs. The purchaser keeps their options open and feels protected against a total collapse of the market. The developer gets cash now and, very importantly, hasn't reduced the purchase price. The purchaser keeps the sense that they may not be throwing all their rent money away if they opt into a better market in the future.

There are other techniques which were very apparent at SIMA (the international property fair) which took place in Madrid in April. Headline prices are the same as say summer 2007. But developers have found other ways to reduce the price without it looking like the price is reduced. There are plenty of cars being given away; a proven if unimaginative motivator much favoured by television game shows in Spain. There were other offers too such as getting paid a salary for a year as soon as you sign up.

The most imaginative and cleverest offer is where the developer is offering to discount the property by the amount of down payment: the bigger the down payment, the bigger the discount (with limits). The developer gets what they need which is cash now and the purchaser gets a discount depending on how much they put down. Greed meets fear head on. And most importantly the price stays the same.

The key is in people's perception. If people think there will be a price collapse this in itself could produce a price collapse. Could it be that the government and developer's imaginative techniques may stave off the much heralded price collapse in the Spanish property market?

The general impression amongst agents is that there are plenty of buyers out there but they are waiting for prices to come down. We also know that mortgages are available in Spain so long as you are not "sub-prime" i.e. you can genuinely prove an income of 3 or 4 times what you are borrowing and you are able to deposit 10 or 20 percent of the purchase price. Spain remains the favourite location for the British to buy holiday and retirement homes. Perhaps when the market does come back it may come back quite strongly.

Monitoring the PIMS Index of Market Sentiment keeps you in touch with the market and may help you decide when to re-enter the market.

Written by: John Wolfendale

About the author:John Wolfendale graduated in 1984 having read Land Economy at Magdalene Cambridge. He spent 10 years in the commercial property investment market in London, at Postel (now Hermes) and Chartwell Land, the real estate company of the Kingfisher group, before moving to Spain where, amongst other things, he built a travel company specialising in Dance Holidays. John is now MD of Property Investment Management Spain, a real estate consultancy in the residential and commercial sector based in Granada, Andalusia. He can be contacted by email or by telephone London Office 020 7043 7479 or Granada Office (+34) 958126272

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Rob in Madrid said:
03 June 2008 @ 15:40

With prices so far out of whack to wages I can't see how prices can do anything but collapse. Here in Madrid the average wage for a young person is a 1000 a month, the average apartment in a nice area 800.000 euros. Prices ALWAYS reflect wages long term it's ecomonics 101.

Secondly the best defination of a bubble is when supply outstrips demand and prices keep rising. In the last few years of the bubble developers built 100% more units than there was demand for. Yet prices keep rising. A classic bubble.

Add in a housing crisis in America the UK and it's only a matter of time till it happens here.

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