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What market forces have affected the price of property in Spain?

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Introduction

What market forces have affected the price of property in Spain? According to the Spanish government, the percentage increase on property in the third quarter of the year rose 13.2%, which has been the lowest percentage increase since the first quarter of the year 2002. Even though it may seem to be a dramatic situation, it may have some positive aspects for the Spanish economy. Perhaps, these prices in the next few years will either, stabilise, or decrease if the country faced recession. If this were not to occur, people would stop purchasing houses due to the lack of finance for such expensive assets and hence, no effective demand. The percentage increase of the year 2004 was 17.4%, whilst this year it has only been 13.7% according to The Economist. This is likely to happen, as it has already started in some countries. England, compared with Spain has already faced some depreciation on property. Government statistics show that there has been a drop of 3.5%. There are also records that illustrate that there has been oversupply on real estate, which may have caused the fall in price. The following data shows that there is a glut in the market of housing. ...read more.

Middle

I was told that the owner has a strategic plan (idea) which allows him to obtain as much profit. We can say that he has a partnership, but with two different companies. He and his partner own both, a construction business and a real estate agency. The real estate agency's objective is to attract clients and sell the properties of their construction businesses so that 3% of the commission (maximum 5%) received from the purchase goes back into their business. Therefore, the owners can be defined as entrepreneurs. I was also informed that in the last project the construction firm, they built and sold three houses making a gross profit of 30.000� per house. The variable costs per house were 50.000� and fixed ones were 100.000� and were later sold at 180.000�. This proves that, firms in this industry make a huge amount of profit and that in the future prices can be lowered or kept stable and therefore might cause less speculation. Due to the massive increase on prices, most Spanish have to ask for a bank loan (mortgage), paid on an average period of 30 years, although we must take into account that ''Spanish mortgage lending rose 18.7%'' this year, which puts banks in a good situation and indicates that their might be a decline on interest rates if there is no default on payments. ...read more.

Conclusion

''The Spanish government wants to limit real estate speculation and mass construction, preferring instead to encourage the rehabilitation of old buildings and to give incentives to people renting property.'' We can see that the government has a good strategy. They want less construction in new land which is why they encourage rehabilitation of old edifices. Why are they so dependant on construction? The state feeds from construction because it provides employment, which means that they won't need to use supply-side policies to a great extent and a reasonable part of tax also comes from it. This will help those who can't afford homes and will enable low income people to rent flats at affordable prices. In addition it will also encourage less speculation, one of the causes of appreciation. Do we actually know how long this is going to last? Having studied this situation I can say that the market of housing has already reached its saturation point. Ergo, they must find a solution, if the government carries on being dependant on the housing market; they might not have enough funds in the future to cover all of their costs such as unemployment and pension payments, leading to a huge crisis. The actual fact is that they already have problems with these payments, which is why they are attempting for an extension on age retirement. ...read more.

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