The dramatic falls in the price of Spanish property in the early noughties had been predicted for years, and owed little to the effects of the global recession.
In simple terms the collapse of the Spanish property market could be attributed to one simple factor, exhibited by many of the players in the event; human greed. The global recession played only a very small role.
The Spanish Property Market
Throughout the 80s, Spain was a country where the cost of living was low compared to the rest of Europe and property was inexpensive. For many it was a dream holiday destination, where property was so inexpensive it could be bought with a bank loan rather than a mortgage and many did buy as an investment, to use for their own holidays and as a holiday rental property. Prices did rise, but in common with much of Europe the market collapsed in the early 90s. At this time many of the properties left empty were snapped up by speculators hoping to make money when the market revived.
As the 90s progressed, property markets across Europe revived and many of these early speculators realised good profits on their investments. The roller coaster of increasing prices started.
Developers Move In
Seeing an increasing demand for affordable holiday property, the developers moved in; taking advantage of the more lax planning rules in Spain. To some, corrupt town halls planning laws were an opportunity for planning permission to be “sold” to fuel the greed of some council officials. Today there are still some former mayors in prison for corruption.
Some developers actually worked in partnership with the town halls for mutual benefit. The net result was a dramatic increase in new property start ups. Prices were rising at 20-30% a year, but from a low base, so that property still appeared reasonably priced. In 2000 it was still possible to buy a good two bedroom apartment for less than £100,000 and a small villa for not much more.
Introduction of the Euro
This event had an effect on the market since there were many people in the Eurozone who had cash under the bed; cash which would soon be useless because it was in the wrong currency. It had to be spent on expensive cars, yachts, and property. The Spanish economy thrives on cash, so there were many sellers prepared to accept cash with no questions asked, so long as the price was right. It was also common practice (although illegal) to under declare the value of a property to reduce legal costs. This could help to conceal the true value of the property to the prying eyes of the tax man.
Buying off-plan was common in Spain: On agreeing a sale, the buyer only had to pay 10% down, with the balance paid in staged payments during the construction period. In a rapidly rising market it was possible to realise a large profit, by selling when only 40% of the payments had been made. As a result, some speculators bought up dozens of properties for resale. In the good times they made a fortune.
As prices rocketed, individual owners came into the picture and they started to put their properties onto the market at inflated prices; hoping for a healthy return and a move up the property ladder. Spanish sellers were also active in selling their simple, unmodernised village houses, at inflated prices to foreigners, so that they could move to a modern property.
By this time everyone was benefiting; estate agents, mortgage brokers, home improvement companies, local tradesmen and shops, but this could not last.
Oversupply of Property
At one stage there were more new properties being built in Spain than there were in Germany, France, and the UK combined. This glut of new property was added to by the increasing number of re-sales, but inflated prices had priced Spanish property out of the market for those who aspired to living in Spain. The apartment which cost £100,000 in 2000, was now priced at £400,000 and potential buyers just could not afford these prices and looked elsewhere, many to the new markets in Eastern Europe.
Added to this, many British buyers became trapped by a slide in the value of the pound, which made Spanish mortgages, taxes, and the rising cost of living unaffordable so they wanted out.
Initially the overheated market simply stalled, but as developers and speculators began to go bust and repossessions spiralled; the banks began to sell off property cheaply to recoup their loans, and prices started to tumble long before the recession had even been foreseen.
For cash buyers there are a lot of bargains to be had in Spain, where property prices now stand at levels lower than those of 15 years ago. Without drastic price cuts, sellers are not able to sell at what they consider to be the correct price.