What market forces have affected the price of property in Spain?
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. The quantity offered is OQS and the quantity demanded is OQD.
Both of these diagrams show the current situation in England. As there has been overproduction, the market has adjusted itself due to the oversupply. Supply and demand have been forced to move towards the equilibrium price which is the intersection point.
Drop in demand due to a fall off in housing construction can lead to a significant drop in the percentage GDP comparing to previous years. If employment fell to the same proportion, this would imply the loss of millions of jobs (wealth of many unemployed is subsidised by the state). Since the government (Spanish) is already running a deficit, and the country is running a trade deficit, the government's ability to use fiscal and monetary policies to boost the economy out of recession will be severely restricted. This can jeopardise the future of the Spanish economy.
To avoid problems, the government has introduced a profit re-investment plan known as, ''La R.I.C'', to boost the economy. This is a fiscal policy adopted by them, which allows investors to keep most of 35% of the profit which must be reinvested in real estate, instead of that money going to Inland Revenue as tax. This indicates that their retained profit is much higher, as profit for tax is kept even though it's in assets rather than in capital.
As I mentioned earlier, it's very likely that prices in Spain will stabilise or fall. Reducing prices ...
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To avoid problems, the government has introduced a profit re-investment plan known as, ''La R.I.C'', to boost the economy. This is a fiscal policy adopted by them, which allows investors to keep most of 35% of the profit which must be reinvested in real estate, instead of that money going to Inland Revenue as tax. This indicates that their retained profit is much higher, as profit for tax is kept even though it's in assets rather than in capital.
As I mentioned earlier, it's very likely that prices in Spain will stabilise or fall. Reducing prices isn't a huge problem to those firms dedicated to the construction industry as they already make a huge amount of profit.
My contact, Isora, is the manager of a real-estate agency in the Canary Islands, called Inmostar S.L. (Ltd). Competitive advantage is mostly achieved through relationships, especially with customers. As workers are paid on commission, they will try to be friendly, and persuasive by mentioning the bright sides to the purchase of a new home.
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.
Banks have recently increased mortgages up to 40 years. If a house is worth 120.000 € at 3% interest rate during 30 years, the individual will have to pay 505 € per month. Then a house worth 140.000 € at the same interest rate during 40 years, 501 € per month will have to be paid. Even though there has been an increase of 16.67%, buyer's monthly costs are still the same.
Nowadays individuals tend to purchase flats which seem much more profitable. We can also see that firms in this industry tend to be product-orientated, rather than market-orientated. Most predict that houses will be easily purchased which is why there is barely market research in the industry and because the population of Spain is increasing, meaning that more homes will be sold.
Furthermore, Barclays has said that ''around 40% of all new houses built on the Spanish Costas were bought by British people''. The good news is that this may boost the Spanish economy as many of these foreigners are living in Spain. ''This comes as good news for those people dreaming of sunnier climes. A growing number of British are moving permanently to Spain to escape the British weather, whilst others are buying second home to spend a greater part of there year''.
On the other hand, the houses purchased as holiday homes will probably be sold after a certain period of time, with owners expecting speculation. Speculation, expectance of appreciation, is the main reason for which property has increased disproportionably without taking into account the adjustment of inflation.
Some Spanish with insufficient finance are unable to afford houses due to speculation. What the Spanish government has done to overcome the problem is to subsidise some homes in certain areas for certain people which is also known as ''viviendas protegidas'' in Spanish terms. Then, ''viviendas libres'' are those which are privately owned and put at a market price.
''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.
