What will happen to Spanish property values if Spain exits the Euro?

08/11/11

An article in www.culturespain.com recently ventured the scenario below. It's an interesting one, but I believe that it only tells the first part of the story. Culture Spain states

I suppose I have to raise the awful spectre that I have seen mentioned nowhere else - the future of the Euro and its affect upon Spanish property. I do this with some reluctance as the Spanish property market hardly needs another knock, let alone just as foreign buyers appear to be returning to Spain to pick up the distressed properties that lie in every direction. However, I have recently noticed genuine fear amongst British sellers in Spain that I have spoken to. They know that they need to sell and, possibly - fast!

Why? Well, if the Euro collapses or a two tier Euro comes into 'play' then the effects upon existing investments in Spain could be disastrous. They could be so devalued as to make any realistic return to the UK (or the primary Euro tier) almost impossible. This is bad news for any business man with holdings in Spain but a horrendous thought for anyone with most of their money tied up in their Spanish home.

The frightening thing is that any devaluation of the Euro (or exit from it) could mean that the existing value of a Spanish property could drop very significantly (yet again!). This may make it very saleable (to foreigners in the primary Euro tier) but leave any seller with a pathetic return on their money, leaving them unable to buy even a vaguely similar property to the one just sold in their own (say) North European country. So the future of the Euro is now becoming a scary subject of concern to any foreign owner of Spanish property with designs on going back to their own country - to put it mildly.

What are the overall consequences for the Spanish property market of this fear for the Eurozone ? I think they are twofold, but I have no hard evidence yet to prove matters one way or another.

Firstly, if foreigners (such as Britons) are trying to sell now then they are quite likely to be more desperate than ever before and therefore prepared to drop their prices ever lower, just to get out of Spain with some decent money whilst they can. This, of course, only further damages the Spanish property market further, at least in terms of foreigner owned properties. It may mean that on the big foreign owned estates in particular that prices go into free fall. Secondly, fear for the future of the Euro may be preventing (understandably) foreign buyers from actually buying Spanish property now. I suspect this is probably the case or may become the case until the whole Eurozone problem is stabalised. If this is the case, foreign buying of property in Spain may stall altogether.

Of course, the worrying thing for any foreign Spanish property owner is that, in some ways, property owning Spaniards will not be affected should there be a devaluation or exit from the Euro. Of course, their properties will drop in value - but only in comparison to the primary Euro tier or other countries. But would that matter to the Spanish? Probably not, as Spanish mobility within Spain's property market would be unaltered. After all, very few have designs upon exchanging their Spanish property for one in (say) Northern Europe - that is only a worry for North Europeans, who often wish to return to their home countries after some years living in Spain. The call of new grandchildren and a wish to live in their home country in old age are strong pulls to return…

In fact, for the Spanish there may be some very good reasons to support devaluation or even an exit from the Euro. This may allow them to jump start their stunned economy (although I personally doubt it will have that effect) by providing them with low labour costs etc. in comparison with the strong countries of the north.

My response to all this doom is as follows

'A financial consultant has predicted that the New Peseta would effectively drop to a value of 65% of the current euro. Inflation and the cost of living will surge as the cost of imports such as oil, gas and raw materials increases and the individual in the country, whilst not being any poorer or richer vis a vis their neighbour, will be much poorer compared to people in countries whose currency has remained the same. To the individual sitting in his house in Spain, he'll see its converted price plummet as against the unchanged, or probably even strengthened euro and pound. However, it's not all bad. Spain will immediately appear to be a cheap country again for those with strong currency. Many more tourists and second home buyers will come and spend as the cost of Spanish natural products in Spain, including labour and houses, will have dropped substantially in euro, sterling, rouble, dollar, etc, terms.

For those house sellers dependant on the Spanish buyer, the prices will stay the same. However, for those in areas popular with foreign buyers, there should be an increase in price, due to increased buyer competition and also as prices will still be calculated at the equivalent in Euros. They are unlikely to maintain their value completely, but for UK sellers they can still drop by up to 20% to bring them back to the sterling equivalent of what they were when sterling was 1.50 to the euro when the property market was at its height.

So, for those needing to sell urgently, a period of turmoil and uncertainty in values will not help them. However, in a relatively short time, a new order of values will settle down, which will reflect the lower cost of living for people buying in foreign currency and thus more of that currency being available to invest in the property, also encouraged by the increased demand.

So, as culturespain ended their blog, potentially this is a brilliant (Good! cf) time to buy Spanish property whilst being a truly rotten time in which to be a seller.

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