What is happening to Spanish property?
The fiesta is over for Spanish property. Scandals, plunging prices and the rising euro have left millions of homes unsold and empty. James Coney reports on the end of Spain's property bubble.
Prices in the costas rose by 270% in the past decade as our desire to find a place in the sun created a huge surge in demand.
But what began as a few thousand pensioners searching for a sunny retirement home, or families wanting a holiday retreat, turned into an investment frenzy. More than 500,000 Brits now own a property in Spain.
Inevitably, as soon as property investors arrived to snap up flats for holiday rentals, the developers moved in. Since 2000, on average more than 40,000 new homes were built every month in the costas of southern Spain.
For a while, everyone looked like a winner. Property and mortgages were cheap. The euro was worth 66p and interest rates were around 3%.
Thousands of professional and amateur property investors made a killing by buying unbuilt apartments off-plan and then selling them at a mark-up, even before they had been finished.
Property developers made a fortune, and the local authorities and businesses reaped the rewards of millions of extra visitors each year.
But in the past year, the party has fizzled out and the euro has risen to 75p, making both property and euro mortgages more expensive.
RISING COSTS
In August 2007, a €150,000 property would have cost you around £102,000, according to experts Foreign Currencies Direct. Today, it would set you back almost £121,000.
In January 2007, repayments on a €150,000, 5% fixed rate mortgage would have been £612.50 a month. Today, they would be £726 - a staggering £1,374 a year extra, just because of the currency change.
The credit crunch in the UK has made British buyers cautious. Not only are they scared to take a gamble on another investment in property, but banks are no longer so willing to allow them to take money out of their home to fund another overseas. Scandal has also hit the costas, ruining confidence in the market. Slack planning laws and a series of corruption cases allowed thousands of properties to be built without proper planning permission.
Around 100,000 of these are in the process of, or under threat of, being ripped down - causing heartbreak and plenty of horror stories from British buyers who bought in good faith. Some Spanish banks also got their fingers burned in this scandal, lending money that they never got back.
As a result, they have become more nervous and, just as in the credit crunch over here, have cut back on the amount they are willing to lend.
Our costs have risen – but we're sticking with our holiday home
Dermot and Jane Hallahan bought their three-bedroom apartment on a golf course near Marbella five years ago. It cost them £160,000, and since then they have seen their mortgage costs spiral by more than a fifth. However, they are keeping hold of their property.
The 56-year-olds from East Grinstead, West Sussex, visit around five times a year. And they have no plans to rent it out. Dermot, managing director of a debt collection firm, says: 'Since we bought, properties have sprung up all over the place.
'A lot of people bought with the intention of making a profit. But we are there for the long-term. 'It's a holiday home, not something that we are hoping to make money out of.'
TIME TO SELL?
Despite rocketing costs, it is probably not a good idea to sell now. Buyers are in a strong position because of the volume of properties on offer.
Even if you do put your property up for sale, you could face a long wait before a suitable buyer comes along. If your property is putting you under financial strain, then there are several things you can do.
Renting is still popular on the costas. More than 13m Brits head to Spain every year, so demand for good accommodation is always high. Remember to look outside the UK, though. The number of East Europeans, Swedes, Dutch and Finnish visitors to southern Spain has increased dramatically in recent years.
Simon Conn, from Conti Financial Services, says: 'Most of these countries have a culture of renting, so this is what they are looking for. Renting is still a great opportunity and a good way of covering your mortgage.' Get payment in whatever currency your mortgage is in - this will help save on transaction costs. It can also help you build up a pool of money for repairs and redecoration. Then you can transfer the funds back to the UK. The good thing about the rising euro is that any money you make on the Continent will get you more pounds sterling.
Owners are making as much as 15% by switching their euro savings back into pounds sterling. In January 2007, £1 would have bought you €1.52. Today £1 will get you only €1.24. Of course, there will be currency transfer costs, but you should still make a tidy profit.
A BUYING OPPORTUNITY?
There is an oversupply of property. An estimated two million apartments are empty, mostly new, built by developers eager to get in on the property boom. Estate agents report another one million are unsold and say sales are down 90% in some regions.
Although many Brits have lost their homes in the property corruption scandal, a large percentage of these will have been bought in good faith, but those involved had cut corners in order to save costs.
Property prices are falling but there are regional variations. If you are buying in the heavily developed areas around Alicante, Marbella and Torrevieja, then your chance of negotiating a lower price is good. But in areas such as Barcelona, Valencia, the Canary Islands and the Costa de la Luz (the area of the southern Spanish coast by the Portuguese border), property prices have barely moved.
Ignacio Hernandez, director of business development for Currencies Direct, suggests the Spanish market will pick up again by 2010.He says: 'If you are looking for a short-term win then this is not the place for you. But this is absolutely a buying opportunity if you are looking for a second property. The euro is high against sterling at the moment, but this will stabilise and property prices will grow again once buyers return.'
Spain has not been hit by the credit crunch in the same way as the UK and U.S. mortgage markets because families have not stretched their incomes as much. Experts suggest the chances of its property market bouncing back quickly are higher, despite British buyers deserting Spain.
May 2008 - Source www.dailymail.co.uk