The Spanish property market has collapsed, not only devastating the economy but also littering the coast with thousands of vacant properties. Is the UK housing market likely to suffer the same fate?
If you think the UK’s housing market is on the ropes, just take a look at Spain’s – flat on its back, punch-drunk and showing no signs of being able to stagger back up on its feet. The country’s precipitous economic downturn looks all the worse after 10 years of phenomenal expansion after which it become the world’s eighth largest economy. With annual growth rising to 3.75%, double the European average, Spain has enjoyed massive budget surpluses and created about 600,000 jobs each year, reducing unemployment from 25% in 1994 to 8.6%.
Driving this boom has been the Spanish construction industry; in particular, the housing sector. Despite having a population one-fifth smaller than the UK, the Spanish have built five times more properties than the UK during the past few years. Property prices soared, doubling between 2001 and the end of 2006, and rising by nearly 60% in the past two years alone.
But the good times are over. Since last year, house prices have fallen in most of Spain’s 50 provinces, and the forecast is for prices to dip a further 8% this year. Spain’s four largest real estate groups have reported a 60% fall in off-plan sales and in January completed house purchases fell 27% compared with the same month last year, according to the National Statistics Institute.
But the really scary figures are those from the Bank of Spain, which show that building approvals and permits have fallen off a cliff since the end of 2006. At their peak, building permits were rising at an annual growth rate of 25%. By autumn 2007, their annual change was –30% – and they’re still plummeting. But although housing starts have been in freefall, housing completions are still at record levels, so a huge number of new-build properties are coming on to the market just as demand has gone cold – actually, frozen over might be a more accurate way to describe it.
In 2007, developers’ sales fell by between 40% and 70%, with the fall accelerating towards the end of the year. Taylor Wimpey’s Spanish division, Tayor Woodrow Spain, reported sales down 44% in 2007. Not surprisingly, many small and medium-size builders and real estate groups have gone bust and others look certain to follow. Meanwhile, it is reported that almost half of Spain’s estate agents have shut up shop.
So what went wrong – and should the UK construction industry be shaking in its boots at the prospect of sharing Spain’s fate?
One thing the construction industry here can’t be accused of is building too many homes. While the UK has barely expanded its housing stock during the past decade, Spain has gone on a construction spree, building about 800,000 new homes a year – more than France, Germany and Italy combined. Analysts believe there is demand for less than 500,000 of those, leading to a glut of supply.
“The fundamental difference between the UK and countries such as Spain and the US is gross oversupply,” says Mark Ryder, Isis Waterside Regeneration’s chief executive. “There may be pockets of overbuilding here, but our problem is too few properties.”
Mike Farley, chief executive of Persimmon, said he thinks completions may go down to 110,000 this year – way off the 240,000 the government needs to meet its pledge to build 3 million homes by 2016. In contrast, even this year Spanish developers are set to build 300,000 homes – almost three times what the UK is likely to achieve.
More unnerving is the similarity in the pattern of soaring house prices and the subsequent plunge. The International Monetary Fund has warned that the recent slide could turn into a rout in European countries such as Spain, the UK and Ireland, where prices have risen far beyond traditional measures of affordability. It pointed out that prices were actually higher in several European countries, including Spain and the UK, relative to income, than they were in the US before its steep drop in prices. Earlier this month, the Halifax reported that UK house prices fell by 4.2% in the first four months of the year.
Few people will look at the forecast fall of 8% in Spain and think it couldn’t happen here. Indeed, some analysts predict a much deeper correction. “With the economy yet to slow significantly and the labour market likely to weaken as the economy loses steam, this housing market correction is only in its early stages,” says Seema Shah, property economist at Capital Economics.
The Spanish coast was turned into a wall of cement resembling one big NCP car park
Mark stucklin, Spanish property Insight
Even so, the impact of the downturn in the housing cycle is likely to be worse for Spain than for the UK or other European countries, since investment in the construction sector there represents a massive 18% of the country’s GDP – in the UK, France and Germany that proportion is about 10%. In Spain, almost one in eight of the workforce is employed in construction and unemployment in the sector has risen by 53% in the past 12 months.
Asprima, the Spanish property developers’ association, estimates the sector will shed 700,000 jobs by the end of 2009. Investment in construction is tumbling – the Spanish construction association is forecasting a drop of 40% in activity in 2008. The knock-on effects on employment are already severe and most analysts expect them to get worse over the next year or two.
Nothing comparable is forecast for the UK – at least for now. But with Persimmon announcing that it has stopped beginning work on new sites because sales are so poor, Taylor Wimpey reporting volumes down about one-third in recent weeks compared with last year and Bovis reeling from a 70% slump in sales, it’s no wonder the sector is nervous. When business monitor Debtwire announced earlier this month that 150 estate agent branches were closing every week, the normally irresistible schadenfreude was eerily subdued.
The Brits themselves look likely to add to Spain’s woes. A combination of falling house prices here, a feeling that Spanish property still looks very expensive, and reports of corruption and poor quality buildings, are making the British very wary of investing in the country – in places such as South Costa Blanca and Murcia, British buyer activity fell by 80% in 2007. The Germans, too, are rolling up their towels and pulling out. Although UK housing doesn’t depend on a huge market in holiday homes, it does have a substantial investor market and this is coming under intense pressure – as was seen when buy-to-let giant Inside Track went bust last month.
Mark Stucklin of website Spanish Property Insight says part of the problem is that that in the boom years anyone could make money on housing, regardless of quality or honesty. “The cowboys took over and developers had no incentive to understand their clients or differentiate their product,” he says. The result: “The Spanish coast was turned into a wall of cement resembling one big NCP car park.”
And while things haven’t been nearly that bad in the UK, there is no doubt that many city centres are suffering from a proliferation of identikit investor flats. Isis’ Ryder says that for the Spanish, “it was all too easy for developers to rely on a captive audience, producing sterile identikit products. But as long as you understand your market, you can win through.”
For Ryder, the problem is not demand but mortgage availability – a crisis developers have no control over and about which he readily admits to being nervous.
Gaspar Lino, general manager of Marbella-based developer Peninsula, agrees: “This is not a crisis of demand, it’s a crisis of oversupply made worse by the credit crunch. Banks have gone from one extreme of lending to virtually anyone to the other almost overnight.” Lino considers it fortunate that his company has seen sales fall by only 40% and knows of other developers in the area struggling against a 90% drop.
But for Stucklin, the downturn is just what the doctor ordered: “The economy in Spain became a bit of a property junkie in the boom years, so a dose of cold turkey to rebalance the economy is no bad thing,” he says. “The downturn might catch short-term property speculators with their pants down, but the rest of us will benefit from a healthier economy in the medium to long term.”
Still, if construction companies in the UK do end up suffering as badly as their Spanish counterparts, they could always take a leaf out of their book and begin buying up Spain’s airports, mobile phone companies and banks …
Mr Bad Example
When Francisco Hernando, a rags-to-riches real estate tycoon, had the idea of transforming 180ha of scrubland into a dormitory town for Madrid commuters, he couldn’t have foreseen the credit crunch.
Whether he might have guessed he would be under investigation for alleged corruption we will know in due course. Meanwhile, what was not long ago a nationwide symbol of an inexorable building boom has come to represent all that is wrong with the Spanish construction industry: mired in corruption, hubristic, environmentally ruinous and unwanted.
Of the 13,000 flats planned for the town of Seseña, 20 miles south of Madrid, only 2,500 have been sold. Another 2,500 are being completed, but Manuel Fuentes, the mayor of Seseña, has said he thinks the new owners may never move in. “Many buyers will prefer to lose their deposits than be landed with mortgages larger than their houses are worth.”
House prices had been rising so fast in Spain that Mr Hernando stood to make a fortune from building a vast residential complex marketed at those who could no longer afford to live or buy in Madrid. But the property bubble has burst and in Seseña the cranes stand idle – it is the same throughout the rest of the country.
The crisis is made worse by the fact that Spain’s construction industry relies on contracting for its profits rather than on the value of land, as in this country. And it’s made worse, too, by the relentless corruption that has made both Spanish and British buyers wary of buying.
“People now expect their local politicians to be on the take,” says Manuel Fuentes. “All they hope for is that politicians do something for their town at the same time.” Now even that hope has faded.