Sunday, June 27, 2010

The next thing to hit Spanish property?

I posted back in January about the outlook for Spanish property prices in 2010 and made the point that there was a threat from the banks. Not just a continuing reluctance to lend on favourable terms, even though that is a big factor which I have seen first hand throughout the year so far. But also because the banks are getting more aggressive at getting rid of the mountain of properties they have been forced to take onto their books.

Previously they had been sitting on unsold properties because if they sold them at heavy discounts that would involve taking a loss. The Bank of Spain had changed the rules to discourage this by asking them to value their property portfolios more realistically. The fear was they would sell at any price. A client told me of a 50% reduction he got on a villa he is buying from the banks so maybe this is being borne out.

Now I read on a forum that the Bank of Spain has also told the construction companies and property developers something similar. To quote:

"The Bank of Spain (that regulates Spanish banking) has told the banks and construction companies that they must value unsold property at 60% of its official valuation (tasacion). This is important because these companies have been unwilling to sell property as discounted rates over the past few years because they have been able to put 100% of the official valuation onto their books. i.e. their unsold properties are worth more to them unsold, than if they actually sell them.

Now they have to value at 60% tasacion, this should incentivise them to lower the prices of their property and actually get them sold. Therefore hopefully (or not depending on your situation) we'll be seeing big drops in Spanish property prices in the next 12 months."

This together with the austerity measures announced and turmoil in the Cajas and the markets (Spanish stock market down 11% in May), suggests things might be dificult in the property market for the rest of the year. The austerity measures include a rise in VAT on new properties and possibly a rise in transfer tax from 7% to 8% in most areas for second-hand sales (see explanation of how IVA is charged on Spanish property on our website IVA on property sales).

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