September began with good news for the Spanish economy: For the first time in recent years, Spain attracted enough foreign investment to start growing. Export volumes hit records, imports bottomed out, and foreigners are creating demand for everything, including in the sector that was hardest hit during the recession: real estate. In the first half of 2013 alone, foreign investments in the Spanish economy exceeded €6.5 billion. The trade deficit fell sharply by 67%, and exports reached €138.5 billion. According to the Minister of Economic Development, this is the result of actively developing new markets, especially in Africa and the Middle East. On the other hand, investors – especially the French, British, and Americans – were buying up shares of international companies based in Spain in the fields of insurance, finance, industry, and construction. Companies of Spanish origin do not elicit 100% confidence.
“Spain is going through the first uptick after a prolonged crisis, says Santos Ortega, coordinator of the Ibero-Latin Chamber. “Nobody was expecting a result like this; even at the end of 2012 the forecasts were not the most reassuring. But here we have the result. It may be that economic growth will be double all the forecasts made to date. However, it is very unstable growth, as it mainly depends on what foreign buyers want. It is true that Spain has been buying less abroad, but it has not produced more. The decline in imports is due to the fall in domestic demand rather than increased production. A striking example of Spanish dependence on foreign financing is its construction sector and residential real estate. The number of mortgages issued to Spanish citizens barely exceeded 10,000 in September of this year, while foreigners were provided with all sorts of benefits and concessions for housing purchases.”
In short, Spaniards really do have something to protest about. The government has transferred all economic power into foreign hands, such as those willing to spend a million euros to buy luxury beachfront homes. Since the explosion of the real estate market, turnover fell year after year. It did not hit absolute bottom due to the fact that it is kept afloat by foreign demand for “seaside cottages.” In the second trimester of this year, 28% more residential units were sold to foreigners than last year. The Ministry of Economic Development states that the reason for this is the sharp price decline in certain segments.
Just from April to June of this year, foreign buyers concluded 13,632 real estate transactions: 3,543 in the province of Alicante, 1,771 in Malaga, 1,008 in Barcelona and 991 on Tenerife, 767 in Girona, and more than 5,500 in other provinces. “Lower prices for a vacation home, which in Spain is often referred to as a `second residence,’ undoubtedly sparked interest,” said Benat del Coso of the real estate portal idealista.com. “But the statistics show that foreign buyers are seeking to purchase high-quality or luxury homes at bargain prices. That is, they are looking for a luxury villa at a 50% discount. The price per square meter fell particularly hard in that price category, as Spaniards cannot afford such houses.”
Poor Spaniard, Rich Foreigner
Data from the National Institute of Statistics show a clear increase in the number of buyers from Russia. Russian tourists, who are so fond of Spain’s entire east coast, are known for their desire to spend money, and not just for a posh vacation. The number of Russians who bought homes surpassed even the Germans, who own almost all the resort real estate on the Balearic Islands.
Some experts attribute this craving for a house on the seaside to the restoration of the law governing foreign property owners living in Spain. This law was in effect in Spain until 2007, and stipulated that a foreigner could get an annual residence permit with the purchase of any residence whatsoever. But at that time, they were not so interested in buying. At the height of the crisis, the Spanish government changed its mind, and it became harder to get a residence permit, in the midst of the fight over immigration. Last summer, it was decided to restore permanent residence permission to foreign owners of residences worth more than €500,000, or buyers of Spanish debt. However, some think that the new “Russian boom” came just at the time of the greatest restrictions on foreigners who wanted to stay in Spain. Neither Russian nor Chinese buyers are bothered by bureaucratic hassles; they are concerned exclusively with their financial options and what the market offers. By the way, the number of mortgage applications by foreigners decreased by almost a third.
At the same time, the number of transactions involving Spaniards fell by 9%, to 67,000 in three months. That is quite small, given that 300-400,000 apartments and houses were sold in the trimester. It has been six years since the real estate boom, but the sector has still not recovered at all. The figures continue to inch downward, and investors and analysts insist that Spanish housing prices still have to fall at least another 20%.
Overall, the number of transactions on the Spanish real estate market, even including foreign investments, decreased by 4.2% compared to the second trimester of 2012, to 80,722 properties sold. Of these, 14,056 are new buildings. This is actually a positive trend, given that at the beginning of the year the market fell by 11%. The reason for the decline was the elimination of tax deductions for housing purchases, as well as the reduction of the number and amount of mortgage loans. Thus ordinary Spaniards get into a vicious cycle: Their income does not allow them to buy decent housing, and the bank is not keen on giving them a mortgage. If the bank does not issue credit, the real estate does not sell, which helps to further paralyze the sector.
“A couple of foreigners will not be enough to restore the normal functioning of the real estate market,” says Benat del Coso. “There is strong demand from the Spanish population, but to meet it requires reactivation of mortgage lending. On the other hand, most potential buyers are waiting for further price reductions and better current conditions of financing.”
Text: Valentina Rinkon