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Mallorca Property Partners 4th Quarter Update 2010: do prices
have further to fall?

We are asked this question more than any other: should I buy now or do prices have further to fall?

Our latest update continues in the vein of our previous reports, giving an on-the-ground perspective intended to be of practical use to people considering buying a property in Mallorca. I have commented on the Euro crises too as this has reared its ugly head again in recent weeks.

With continuing economic instability very much in the headlines, it's hardly surprising people are still asking this same question. Prices have fallen and it's a buyer's market, but nobody wants to buy now and find they might have bought for less six months down the line.

A recent report, the Knight Frank 2011 Global Residential Market Forecast, predicts that Spanish property prices will have declined by 4% in 2010 and that there will be a further decline in 2011. However, the report sees prices coming back to sustainable levels, so the decline will be less at 2%.

The October 2011 IMIE report from TINSA, a leading Spanish property valuation consultancy, shows that year-on-year to October 2010, prices in the Balearics and Canaries fell by 5.5%, one of the highest declines of any region in Spain.

TINSA do not predict what will happen in 2011, but it seems likely the comparable figures will reflect Knight Frank's predictions for Spain as a whole. I.e. average prices in the Balearics and Canaries will continue to fall but to a lesser extent than in 2010.

Going by these reports many would judge it prudent to wait a while before buying. However, while market statistics have their role to play, they can be misleading. Most importantly, all the available statistics show averages across different types of location and properties with very different price dynamics.

A report averaging statistics across both the Balearics and Canaries includes properties in the domestic sector as well as the ex-pat/holiday home sector, with prices ranging from under 100,000 Euros to 20 million or more. Within Mallorca itself, package holiday resorts such as Cala Millor and Cala Romantica on the east coast have fundamentally different market dynamics to sought-after locations such as Portixol. Categorising them together is of little use to a prospective property buyer.

The same is true of the way property trends are reported in the UK. Recent reports state prices to be falling across much of the country while London is said to be bucking the trend.

The real picture is different; there are many central London locations where prices are supported by wealthy foreign buyers. In the most prestigious such as Kensington and Nottinghill, the price of good properties has been rising. However, prices in other parts of London are still under pressure the same as in other parts of the country.

The more detail buyers have on local price trends, the more able they are to assess the investment potential of different properties. But whereas in London you can find accurate statistics on local sale prices, they are not available in Mallorca. A more detailed understanding of the market here can be built only through on-the-ground experience.

Our own view on the market is drawn from the enquiries we receive and regular discussions with estate agents, lawyers and other property professionals across the island. The picture this paints ties in with the predictions made in our 1st QTR 2010 update. This outlined how, during a downturn, prices of prime properties tend to decline later and at a slower rate than for non prime properties. They also start rising sooner and at a faster rate when the economy turns around.

While the global economic recovery is currently shaky at best, recently there have been more hi-end sales in Mallorca and the indications are that more sales of mid-range properties are beginning to filter through.

This is not evident at the lower end of the international market, nor in the domestic sector, and it seems likely that these could take longer to recover. The less expensive resorts for example formed a large portion of sales in Mallorca. Typically purchasers were buying 2 bed holiday apartments, often with 90%, 100% or even 120% loan-to-value mortgages. Such excessive loans are no longer available, so a significant part of the demand for these properties has gone and will not return in the forseeable future.

In short, it looks like prime properties in Mallorca have more-or-less reached a "market bottom" whereas non prime properties have not. Currently this is most evident at the very top end of the market and the indications are that the same trend will become evident in mid-range properties in the international sector of the market. Average prices of properties outside of these sectors most likely have further to fall, albeit at a slower rate as noted above.

This does not necessarily mean you should only buy in a prime locations at present. It means that if you are not buying in a prime location you should be confident you are getting a deal that gives you some leeway if prices do indeed fall further.

Following on from this, you need to drill down to street level within the prime areas. You need also to look out for the most sought-after features such as sea and mountain views, proximity to the beach and so-on. Cont.

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