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).

Related posts and articles:

Why Spanish Property Prices Will Stay Depressed

Spain's economic crisis turns nasty

Now everyone can buy property safely in Marbella

It's the nightmare scenario - you buy a house or apartment in Spain through a legitimate estate agent and hire a lawyer to do all the checks, but down the line you are faced with a demolition order. Your dream home is demolished without compensation because it was illegally built even though you appeared to have done everything possible to make sure it was legal. This has happened to a few people and thousands of other Spanish property buyers have been threatened with this outcome causing untold amounts of stress and worry. How can this happen?

It's a complicated tale but essentially if the local Town Hall has corrupt officials (many do) and they are prepared to give the go ahead to build on land where they shouldn't, it may appear that a development is legal only for the regional government to overrule the local decision and declare the build illegal at a later date. They often press for demolition even though the property owners are innocent and have no redress against the developer who has gone bankrupt or the officials who are in jail.

Is it possible to protect yourself from illegal build scandals like this? Yes, but you need a good lawyer who is prepared to go the extra yard to check whether a development is legal. Just seeing that the development was approved by the Town Hall is not enough. Did the Town Hall have the right to approve the development? To find this out you have to go to the area's land use plan called the PGOU (Plan General de Ordenacion Urbanistica) which sets out perhaps every 10 years (the duration of the plans varies) how the municipality's land can be used - areas that can be built on or industrialised and areas that must be left green.

Up until now Marbella has been a cesspit of problems of these kind due to super-corrupt politicians including the notorious Jesus Gil whose PGOU was never even agreed by the regional government in Seville and left up to 18.000 properties technically illegal. Finally after years of haggling a new PGOU Marbella was agreed at the end of January this year. This retrospectively legalises most of the illegal builds but leaves the status of a few hundred up in the air.

The significance from a future property buyer's point of view is that now we have a firm point of reference against which to test the legality of a developer. Good Spanish property lawyers should not need to be told to check back to the PGOU if any doubt whatsoever exists over the legality of a development but forewarned is forearmed, if you are buying in Marbella be sure to remember the four letters "PGOU" and ask your lawyer about them.