house prices Spain | Property Works Mallorca Chartered Surveyors

The controversial conclusion of a study on the average capital of European citizens per country, elaborated by the European Central Bank (ECB) and published last Tuesday, is that the average Spaniard is richer (and much more so) than his German counterpart.

At a time when southern Europe calls for the “solidarity” of its supposedly wealthier northern neighbors, it is surprising to learn that, in fact, in terms of private capital, things are not what they seem. According to figures from the ECB, the average net assets (minus all debts) of an average Spanish citizen totaled 291,400 euros, compared with 195,200 for Germans, 233,400 for the French, 170,200 for the Dutch or 275,200 for the Italians (the second highest). If these data are correct (in Spain they were collected in 2008 before the housing bubble had fully burst), it would mean that the average Spaniard is 50% richer than the average German, 25% richer than the French and 71% richer than an average citizen from the Netherlands.

This is not all. In fact, if we look at the medium -that is, those Spaniards located in the middle of an imaginary list going from the richest to the poorest, the difference is even greater: the median in Germany is 51,400 euros, 115,800 euros in France and 103,600 euros in the Netherlands of EUR, while in Spain it totaled 182,700 euros followed by 173,500 euros in Italy.

While the Germans account for 28.7% of European households, they have only 24.3% of Europe’s wealth, while the Spanish, with 12.3% of households, has 15.6% of the EU’s capital.

Incidentally, a special case in all these comparisons is Cyprus. Its citizens, with an average of € 670,900 (266,900 euros of medium) are the second richest in the EU after Luxembourg.

The key to this surprising data is the different ownership structures between citizens of one country or another. Spaniards and Italians have a huge love of bricks and mortar. That is, they want to own their homes. And the truth is that they do: 82.7% of the Spanish and 68.7% of Italians own their own homes, compared with 44.2% of Germans and 55.3% of the French.

The average capital among Spanish homeowners is 337,900 euros, after deducting outstanding mortgage debt; while the capital of non-homeowners is 68,900 euros. German homeowner’s average capital is higher, 381,200 euros. The problem is that many Germans do not own property.

Obviously, other factors should be taken into account. First, the average income in Spain is still well below that of its northern neighbors. And this is important because homeownership burdens become heavier when the family’s income is lower. On the other hand, we must keep in mind that one has to live somewhere.

Furthermore, it should be noted that only 5.6% of Spaniards have mutual funds, compared with 17% of Germans or Dutch, and only 23% have private pension plans, compared to 46% of Germans and 50% in the Netherlands. This will mean, in the future, that citizens from these countries will have higher incomes, but also face an extra expense that homeowners will not have to face.

So, the question is: which is better, having a larger capital but a lower income, or having a higher income in exchange for lower equity?

Borja Mateo (www.borjamateo.com) is a real estate expert and author who believes many people misunderstand the property market, which leads them to make the wrong investment decisions. He recently published an article in the Diario de Mallorca answering some basic questions about the current state of the market. Here we summarise his most interesting points.

The current state of the market can be gathered from the following facts: Prices of real estate have fallen around 48% since their peak. There are between 6.1 and 8.5 million properties which are either empty, under construction or in the rental market. The annual demand for new housing is of 130-170 thousand units, so the existing housing stock will be enough for many years. Current prices still do not reflect this over-supply reality.

“The area in which I am interested is different” This is a common mistake. The drop in real estate prices affects all areas to a greater or lesser extent. Reduced access to credit and the high supply of properties are relevant factors currently affecting all areas. It is true that some areas are less affected than others, but it will be dangerous to believe that a particular area is completely immune to drops in prices.

“Banks are going to start lending soon and prices will skyrocket”. Reality is quite different: banks are not going to go back to previous lending levels anytime soon. The Basel III reform, which has greatly affected the credit market, means in practice that much less credit will be available for families in the near future.

“Lowering the price any further would be like giving the property away”. False. No property owner thought prices would drop like they have, but it happened. Prices that seem bargains today, in a few years may be considered expensive. It is a fallacy that prices will not go any lower. Only when the number of property transactions has recovered strongly we will be able to say that prices have bottomed out: for this to happen, we think prices have to come down even more.

“Nobody is going to sell a property at a lower price than the one they paid for it”. These days, buyers and tenants have the upper hand. The over-supply of rental properties is pushing prices down. Lower rents mean lower property valuations, as their potential rental yield is factored in. This underlying conditions are not going to change for a while.

“The property is being sold at cost price”. The fact that the price of land has dropped by 80-100% from its peak, means building is now much cheaper than during the housing bubble. Therefore, it is perfectly feasible that the current market price of a property is now well below what it cost to build.

“Nobody is going to want to sell at a price lower than their mortgage”. Many people would happily sell just to cover the amount of their mortgage -just ask those who have been evicted. Today’s prices are 20% lower than last year’s, and more expensive than they will be in twelve months’ time.

“In my area, no one needs to sell, so prices will not fall”. An unemployment rate that may reach 28% in 2013 affects everyone. Prospective buyers demand discounts. As general supply increases and demand decreases the decreasing-prices dynamic intensifies.

“The bank is financing it, so it has to be a good investment”. Mortgages are great business for banks: buyers are offering a large asset (the property) as guarantee, plus their own personal guarantee (all their present and future assets), plus often those of a guarantor.

“After a cycle of drops in house prices, there must come one of rising prices.” In the current situation, with an existing house stock that exceeds 63 times the annual demand for housing, this cycle could perfectly last for 20 years since 2006.

“Why rent when you can buy. Renting is throwing money away”. In the same way that rent is an expense, so is the payment of interest -and much more so when it comes to acquiring an asset whose market value is falling. If we compare Mr A who buys a property with transaction expenses of 7%, a decrease in prices of 10% over the next 12 months, and a mortgage at 1.5%; with Mr B, who rents an equivalent property paying a rent priced at 3% of the property’s value, we can see how only during the first year, Mr A has lost 14.3% of the purchase price while Mr B loses only 3%.

So, as a general comment, the best thing now would be to wait as much as one can before buying or renting (or to sell as soon as possible) as prices will fall further in the foreseeable future.