Buying property in Spain

by Jose Marc Castro on October 4, 2009

costoflivingSPAIN200The last few years have seen the Spanish property market experiencing something of a boom time, with both foreign and local buyers looking to snap up prime properties. While Spain has a fully developed property market, there are massive regional variations that can often give the wrong impression to those not doing their homework.

The single currency and with 96% of the properties on free-floating mortgage rates, the market in Spain is expected to be quite volatile. Expats wanting to live in Spain need to do their research. The internet and a more professional approach to buying abroad has alerted many to the potential pitfalls of buying overseas property, resulting in foreign investors taking more time to evaluate and make offers. This more conservative approach has led to a cooling of the market, together with the fact that other areas of Europe now offer potentially better value than Spain (after the recent boom years).

Contents: Property Market Performance in SpainProperty Costs in Spain

Spanish Property Market Performance

The Spanish market has been very volatile over the last decade, with 1996 and 1997 property price rises in the low single digits, while 2002-004 saw price inflation between 17% and 18% per annum – a trend which could not continue for ever.  The increase in property prices fell to 9% in 2006, with many observers expecting a further slowing of the rate of growth in 2007. Overall, the real estate prices in Spain have risen over 201% from 1995 to 2007. With over 80% of homes owned by individuals, much of the market is influenced by current fiscal standards and deductibles are applied to income.

The market is also experiencing something of a reality check with local estate agents commenting that many sellers have yet to realign their sale prices with the recent market consolidation.  There are however signs that the news is slowly filtering through, with average sale times extended someway from the earlier boom times.

An interesting trend has also appeared with English speaking buyers ignoring the central and northern property markets, which actually showed the most growth last year.  The worst performing area was the southern region of Spain which has predominately been a hive of activity for UK buyers.

Longer term the Spanish property market is still very attractive, although this current period of consolidation offers a chance for prices to take a breather.

Property Costs in Spain

As with any property market, there are particular cost factors that need to be taken into account – with Spain no different.  Not all property markets are the same, and costs can vary wildly!

The current trend in the Spanish property market is its continued downward spiral at rates as much as 8.9% in the last twelve months. In the coastal regions, prices fell over 10%. This is further complicated by the dizzying number of rules that are considered in purchasing property, as elucidated in a post at the Spain Expat Forum last October 9, 2009:

I think you have to pay IVA on a second hand property at a reduced rate, not sure what that is tho! I do know that whatever price you buy a property for in Spain you will pay at least 10% more in fees! Mortgages are extremely difficult to obtain inSpain at the mo, they are reluctant to give self certification mortgages or to give mortgages on anyone who has been here less that 2 years, but I’m sure if you hunt around, they could be found. But 100% on anything when prices here are still apparently falling would be near impossible to get IMO

Taxes

There are a variety of taxes payable when purchasing Spanish property, although they depend on what type of property you are buying.  If you are buying a resale property from a private individual then you will be liable to pay transfer at.  However, if you are buying a new property you will be liabile to VAT as well as stamp duty.  While there are some region variations to the tax charges, they general level off at between 7% and 8% of the purchase price – far higher than places such as the UK.

It also goes without saying that when buying property abroad you need to employ the services of a local lawyer, ensuring that you abide by local laws and pay the relevant taxes.  There have been many cases of buyers acquiring property only to find that the correct paperwork has not been completed – resulting in potential expensive and often long drawn out investigations by the authorities.

There are also arrangement costs of 1% for each Spanish mortgage which needs to be factored in to your calculations.  It is essential that you respect local laws and procedures, as many have learnt in the past!

An expat outlined the tax schemes in property purchases in Spain in a post at the Spain Expat Forum last October 19, 2009:

The Impuesto de Transferencia is not VAT, but I believe it’s 7% in any case, just like the VAT in a new property (and 8% from next June I believe)

You can reckon on 10%-11% of purchase price for the taxes, notario and the like.

The Tax is worked out by Hacienda on the value it is Escriturado for. Hardly ever the same as the Market value. As a guide, I would say that a 380K or so house would be Escriturada for about 250K or so. This will be similar to the valor catastral and on which rates and the like are based. Usually, if Hacienda’s tables don’t agree with what it’s registered for, they send on a little present after the initial payment of the Tax – a top up to meet their table of values for that property in that area…. at which point you pay the diff between that already paid and what they say you should have paid.

As for the banks setting prices – well, twas ever thus in any country. If you need a mortgage, then their valuation (about 350€ or more) will dictate what they’ll loan. This is nothing to do with what the property is on the market for as the vendor will decide what they will and what they won’t let it go for. The fact that the bank will only loan 80% (70% for non residents was the guideline from Banco de Espana when I last looked for someone) is an additional headache as once again, this takes you even further from what the seller is willing to accept.

I remember this when the guy buying my house in the UK in 1992, argued that the bank had valued it at 20% below what I was asking. I told him that I was not willing to argue the bank’s market risk assessment process with him and that the estate agents valuation stood. He ended up paying what I was asking (very close in fact) as I don’t think he understood that Bank valuations in the negative credit housing market we were in had nothing to do with market value as at that precise moment. Obviously I was lucky he could go ahead with a less % mortgage than he was obviously hoping for.

All of the property valuations, as in any market, have a finite time value and what the market’s done in the last two years is of little interest to the bank who will want to value now for a now mortgage (though as stated, their valuation will reflect current market trends V. the risk they are willing to take…. and of 80% MAX. mind you, you could find that if your finances are good and demonstrable, they will be happy to give you a 20% of the value personal loan – at a much higher percentage of course.

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