If the construction sector were a Stuka bomber, where would it be in the dive?

Planning approvals continue their collapse, but at least the dive shows signs of bottoming out.

Planning approvals over 5 months to the end of May fell 21.8% compared to the same period last year, according to the latest figures from the Government. In total there were 40,000 planning approvals by the end of May this year.

A fall of 22% sounds bad, but in the context of the collapse in residential building it contains a seed of good news, or at least that is how the majority of the Spanish press are choosing to interpret it (bad economic news is so boring!).

The good news is that the bad news today isn’t as bad as the bad news yesterday. A fall of just 22% is positively rosy compared to the stomach-churning nosedive of 58% last year, and 36% as recently as January this year.

One way to look at it is if the Spanish construction sector were a Stuka bomber, it would be just about to release its bomb. Just hope the pilot then manages to pull out of the dive and head back up.

Meanwhile, refurbishments are up, but not enough to even scratch the surface of the residential construction sector’s woes. They rose 11% to 13,600 refurb licences compared to the first 5 months of last year. Nice work if you can get it, but it still leaves more than a million construction sector workers looking for a job.

The right to decent housing may be enshrined in the Spanish constitution, but not even the Ministry of Housing can escape the substantial budget cuts announced by government to get the deficit under control. As of next year “some incentives to build and buy” social housing will be eliminated, the Ministry of Housing says, with cuts phased in over 2 years. To help “reorient the budget” of the housing plan, resources will focus instead on incentives to rent and refurbish public housing.

Developers are furious. Housing starts have collapsed to historic lows, and many developers were banking on contracts to building public housing just to stay afloat. They are doing their best to try and scare the government off.

According to Pedro Pérez, head of the G-14 group of Spain’s biggest developers, real estate activity and residential construction are of “capital importance” to Spain’s economic recovery and job creation. “It is one of the businesses that has the biggest impact on jobs, both directly and indirectly,” Pérez told the Spanish press. So any threat to the real estate sector should be interpreted as a threat to the Spanish economy.

Pérez warned that “taking away one of the few remaining incentives to buy property will have a negative impact on the economy in the short term,” and will “run the risk of snuffing out the incipient and weak recovery the sector has seen since the end of last year.”

“All told, in Spain we’ve been through various years in which, not only have there been no measures to soften the crash in the sector, but also they are taking away the few remaining stimulus,” grumbled Pérez.

Along with Bulgaria, Turkey, The US and Israel, Spain is one of the most popular overseas destinations amongst affluent Russian house-hunters, according to a study by real estate agents Gordon Rock and mortgage brokers Lowel Finance.

Russians buying in Spain spend between 50,000 and 150,000 Euros on flats, and 300,000 plus Euros on Villas.

At the very top end, Russians in Spain have some of the biggest budgets of all, often in the multi-million Euro bracket.

Nevertheless, Russian demand is feeling the pinch of the economic crisis this year. Russians are expected to spend 9.3 billion Euros – 10% less than last year – on property abroad.

Why have property prices fallen less in Spain than other countries that had property bubbles like the US and the UK?

One reason is because the official housing price data in Spain is completely dodgy, but that’s not the full story. It doesn’t explain why asking prices haven’t come down by more.

A recent article in the Spanish daily El Mundo gave another reason why prices haven’t corrected as much as one would have expected: price manipulation by the everyone’s favourite villain, the banks.

“With the majority of the big developers drowning in debt, the banks are now the ones who determine the rhythm of prices,” explains the article.

How are banks keeping price high? Firstly, by improving financing terms rather than reducing prices. “The main answer is that the banks are selling their own stock by improving their financing terms rather than dropping prices, “explains the economist José Luis Campos Echevarría. “This strategy will cost them in the medium term, but it lets them solve the big problem they have in the short term, which is to off-load properties without prices falling too much.”

And secondly, by drip-feeding their stock, rather than flooding the market. Spain may have a monumental housing glut, but banks are keeping a big chunk of it off the market.

Banks are also back to the bad old practise of offering 100% financing to buyers of their stock, allowing them to attract people without any capital. “They are making the same mistakes as they did in the boom,” one expert told El Mundo.

What the article doesn’t ask is how long can this go on? As I see it, as long as the European Central Bank (ECB) continues to supply them with unlimited funds, (and the Bank of Spain stays lenient with rules on provisions). Were the ECB to turn off the money tap, banks would be forced to get money from other sources, like dumping their property portfolios at any price.

170,000 companies in the construction sector – 23% of the total – have folded in the last 2 years (2008-2009) reveals a new report from Spain’s Fundación Colegio Libre de Eméritos Universitarios.

The biggest chunk – some 108,000 builders, or 64% of the total – went under in the course of last year.

As is typical of the sector, the vast majority were SMEs with just a handful of employees:

The carnage in the sector is forecast to continue for at least the rest of this year, though the number of builders going to the wall will decline in absolute terms.

The harder they come, the harder they fall

The real estate sector has been hit particularly hard by Spain’s economic crisis:

Of the 4 million companies set up in the decade 1999-2009, 17% were in the construction sector, substantially higher than for other key sectors like tourism. As boom turned to bust, the sector has paid the price of its former exuberance. “As a consequence of the bursting of the real estate bubble, the rate of change in the number of real estate companies has fallen more acutely than the rest of the economy,” explains the report.

Looking forward, the report argues the sector should play a leading, though more sustainable role in the economic recovery, and criticises the government for reducing the infrastructure budget by 6.4 billion Euros this year and next.

A recent article in the Spanish financial press made me smile. It described how stony-broke town councils, especially those hardest hit by the real estate bust, have come up a with a controversial but apparently legal way to raise money; by forcing banks to develop land acquired in debt-for-property swaps and charging them for the privilege.

Thanks to the real estate bust that has dramatically reduced the fees earned from developers for building licences and such like, local councils are now 15 billion Euros a year poorer than they were. Many of them are bust, and desperately need money, especially in southern regions like Andalucia and Valencia.

Who has all the money these days? The banks, of course. Town councils are reported to be targeting banks with development land and throwing the rule book at them. The job is made easier by tip-offs from former owners quite happy to see the banks suffer a bit.

Town councils have the law on their side. Land laws in Spain allow for compulsory purchases by town councils if certain types of land are not developed within a set period. The councils can buy the land at rural land values, often around 10% of the book value. So the choice they give banks is ‘develop the land, or we will take it from you and pay you 10% of what it’s worth on your books’.

That’s not much of a choice for banks, who can’t afford to take a 90% write down. It’s often cheaper to build.

But the last thing Spanish banks need right now is spending cash building more new homes when they can’t sell the ones they already have.

Discounts of up to 30% at Sotogrande’s remarkable marina development Ribera del Marlin

Sotogrande Ribera del Marlin

Sotogrande Ribera del Marlin

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A growing number of vendors trying to sell their homes are dropping their asking prices, according to new research by Idealista.com, one of Spain’s leading property portals.

Asking prices for 18,007 resale properties in the Idealista database were reduced in June, 30% more than same time last year, and the highest level for 2 years (see chart below).

The number of price reductions has been on the rise every month since January, causing the 12-month average trend to rise after falling for about a year.

But if the number of discounted properties is growing, the average discount value is not. Discount values peaked at the beginning of last year and have been declining ever since, so it’s a story of more, but smaller discounts.

Country-wide, 6.3% of resale properties listed at Idealista were discounted in June. The average price reduction was 8%, or 25,332 Euros.

Madrid and Barcelona lead the market down

The markets where the biggest proportion of vendors decided to drop prices were Madrid (9.3%) and Barcelona (7.4%). That means vendors in Spain’s two biggest markets are becoming more focused on finding a buyer.

In Murcia, on the other hand, only 4.3% of vendors reduced their prices, despite a heft glut of homes. Vendors in Murcia are going to have to follow the lead of Madrid and Barcelona and get more serious if they want to sell.

The table below shows the percentage of vendors in each region who reduced prices (in the first column), and the average discount (in the second column), all figures and charts from Idealista.

Asking price reductions growing in volume but not value

As I have already said, price reductions are growing in volume, but not value. Recently Idealista published other figures dealing with values. Here is a summary of those figures:

- Asking prices were down just 0.5% in Q1 over Q2, to 2,374 €/m2.
- Prices rose in 5 regions: The Balearics (+2,4%) Galicia (+1,6%), Castilla y León (+1%), The Basque Country (+0,9%) y La Rioja (+0,6%).
- Prices rose just by 2 €/m2 in Barcelona, to 4,084 €/m2. Even so, prices there are still below where they were 5 years ago in Q1 2005. They are down 16.4% from the peak of 4,888 €/m2 in Q1 2007.
- Madrid fell 0.4% in Q1, to 3,831 €/m2, 11.2% below the peak of 4,315 €/m2 in Q2 2007.
- Valencia fell 0.7% to 2,335 €/m2, 18.4% below the Q2 2007 peak of 2,861 €/m2.

Average national prices fell just 3.7% over 12 months, and just 0.9% between Q1 and Q2, say the figures, leaving the average price of Spanish property today at 1,849 €/m2.

As usual, there were considerable regional variations, as illustrated in the following table of selected regions (popular holiday-home regions highlighted in blue). Prices fell the most in holiday home regions like the Canaries (-7.2%) and Malaga / Costa del Sol (-5.8%).

I always slag off the Ministry of Housing figure’s for failing to capture the true extent of the bust. But if you compare latest prices with peak prices for selected regions, you can see that even these dodgy figures show falls of 18% in Malaga, 17% in Alicante (Costa Blanca) and Las Palmas, and 16% in Murcia. These are not insignificant falls, though in reality they are probably up to twice as big.

And if you turn the figures into an index with Q1 2000 as 100, you see that 1) prices are back to where they were around the start of 2006, four and a half years ago and 2) in real terms (after adjusting for inflation), prices are only 70% higher than there were a decade ago, and falling.

That said, you can also see that the big surge in prices took place in the 4 years leading up to 2006, so there are still plenty of capital gains on the table to give up, if the Ministry’s figures are to be believed.

But first, what do the latest transaction figures have to say*?

Excluding social housing, there were 33,873 residential property transactions in May, 10.6% up on the previous month, with both new and resale transactions up on the year.

But compared to May 2007, when sales was starting to turn down, the market is 49% smaller as measured by transactions.

And how about by value? All markets are a function of transactions and prices. Transactions tell you the volume or how big the market is, whilst (transactions x prices) gives you the market value.

Well, we know that the market has shrunk by 49% in volume, but we don’t know how much average prices have fallen because the official statistics on this question are baloney (around 10% they say).

Based on talking to estate agents and developers, my best guess is that prices are down somewhere around 30%, but let’s look at a spread between 20% and 40%.

To spell it out, if average prices have fallen 30%, that means the Spanish property market is now worth just 36% of what it was back in May 2007, a value decline of 64%.

That’s a big chunk of output and wealth that has evaporated from the Spanish economy in the space of just 3 years. A lot of people depended on this market for their livelihoods.

It helps explain why Spain’s town halls are 15 billion Euros a year worse off thanks to falling taxes and property-related income, and why a third of them are already struggling to pay their bills, including payroll. Many will go bust this year, especially in regions like Andalucia.

The Bright Side

But looking on the bright side, the figures also show that the market has at least stabilised at somewhere between 30,000 and 35,000 sales a month (excluding social housing), and that both new and resale transactions rebounded slightly in May on a monthly basis.

On a yearly basis, the market is still growing, albeit not as robustly as before: The annual rate of growth fell from 17% in April, to 11% in May.

On a regional basis the picture is mixed. The market plunged 17% in Malaga (home to the Costa del Sol), and 11% in Murcia, (home to numerous unsold golf developments), but rose 50% in Huelva (Costa de la Luz), 26% in Catalonia (including Costa Brava and Costa Dorada), and 24% in The Canaries, as you can see from the following table.

What next? I forecast that transactions will bounce along in the same range for the rest of the year, between thirty and thirty five thousand. We will have to wait until next year for a recovery.

*Regular readers of this blog will have often heard me rant about the lack of reliable data, but these transaction figures from the INE are quite credible. Though I suspect they over-state sales by including what are effectively balance sheet operations by banks, I think they probably give us a reasonably accurate picture of what is going on in the market.