Credit crisis and the effect on property for sale on the Costa del Sol

Well let’s be honest the current economic crisis has affected everyone to some degree. Higher prices of basic necessities (bread, milk, etc…), increases in interest rates or simply paying more at the petrol pump.

This is no different in Spain. But there are certain differences that put Spain in a stronger position than the other economies that have benefited from the decade long property boom such as Ireland, UK and the USA.

First there are the banks. Unlike UK banks, Spanish banks have been wary about giving 100% mortgages. The general rule of thumb was to offer non-residents a maximum of 70% of the valuation and residents 80%. This sum also had to be no higher than 35% of your total income.

Example

Agreed sale price 200.000€

Valuation: 230.000€

Mortgage: 161.000€ (70%) or 184.000€ (80%)

The remaining sum, plus taxes (10% to 12%) had to be paid by the purchaser.

This does not mean that individuals did not find a way around this. ‘Optimistic evaluations’, inflated sales prices even forgeries!

But these made up a minority of all purchases.

But there has still been a downturn in the construction and housing markets, so why have the banks managed to power ahead unlike their foreign counter-parts?

Well there are several reasons.

First after the Spanish banking crisis of the 1980’s the Bank of Spain actually learnt from its mistakes. This was a time when 50 banks (along with 20% of the country’s deposits!) went bankrupt.

With a tighter reign on lending practices, Spanish banks were unable to take advantage of structured investment vehicles (SIVs) which have turned out to be the main cause of the sub-prime crisis.

“Anything that the bank invests in has to be on the same balance sheet,” says Professor Pedro Schwartz, of San Pablo University, in Madrid. So no hiding high risk investment under the table, which is now becoming apparent, was a standard practice in many other banks around the world.

So instead Spanish banks diversified and invested not only in the Spanish market and the USA but also in the fast growing economies of Latin America which has allowed them to spread their risks.

The Bank of Spain also insured that Spanish banks had built up a reserve to prepare for the leaner times that were bound to come.

Of course this is not the only issue to affect people. Rising costs mean that the average person have less spending power when shopping, so retail businesses are affected. Unemployment is on the rise in the construction sector and in the last year nearly half of all estate agents on the Costa del Sol have closed down. There has also been an increase in defaults on purchases made using credit cards. Thankfully there is less of a credit culture in Spain than the US & UK but the effect will still be felt by many.

But what is the upside of all of this? Well first of all, there are more bargains to be had if you are willing to shop around. Many shops and stores have ‘special’ offers and discounts.

If you are looking at buying a property on the Costa del Sol, vendors are more likely to listen to reasonable offers as in the case of many British homeowners the strength of the euro and the economic situation in the UK is causing a tightening of the financial belt.

Home owner are being less profligate within their homes which can be beneficial to the environment.

As property prices stabilise more first time buyers should hopefully find it easier to buy their first homes.

There is also a tightening of regulations by the Junta de Andalucía to help control the excesses of the past, and to help the economy diversify further away from construction and tourism.

Regards
Andrew Bellés
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3 Responses to “Credit crisis and the effect on property for sale on the Costa del Sol”

  1. Jason says:

    We are currentlty looking to buy in Costa del Sol and need a mortgage, not 100% and good job as we dont think we would ever get it but around the 50%. We are just unsure if it would be better to aproach the bank here in Spain or back in the uk. Can anybody tell me the difference if there is any at all?

  2. Dear Jason,

    personally I would recommend using a bank in spain. But that will come down to whomever offers you the best deal. What is worth noting though is that most mortgages in spain are based on a flexible interest rates. So if the ECB rates go up, so does the mortgage, but the reverse applies aswell, which is good considering they have just been reduced by .5%.
    Also about mortgages in spain, as i mentioned it comes down to income. There is no reason you cannot get an 70/80% mortgage as long as you income is high enough. If not you might have to set you sights lower or as you commented go for a lower % on your mortgage

  3. Spanish Property for Sale says:

    Very good site! I like it! Thanks!

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