A Housing Prices Paradox?
There is a common belief that during the current economic recession caused by COVID-19 property prices should drop. But then why do buyers struggle to find discounted properties on the listing portals? Why don't you see the expected price decreases? In this article I share my insights and analysis and use real-life examples from our daily practice as real estate buyer agents.
The Reality Is:
Real estate listing portals are a confusing indicator for today's true market prices. They show generally overvalued asking prices and historic data, not the transaction prices agreed between buyer and seller. Over time, portals will provide a good trend view, but that's too late for your purchase decision.
Today's economic recession has reduced local and foreign demand for Spanish properties, while on the supply side certain owners need cash and are willing to sell quickly, at a discount. This results in more power for the buyer and lower prices. In my April 2020 article What Effect Will the Coronavirus Have on the Property Market in Barcelona?, I expand on the implications for buyers, investors and sellers.
Valuation companies, who work for the banks when you apply for a mortgage, have started to systematically lower their property valuations. One large tasadora told me, for instance, that they have instructed their teams to apply a universal correction factor of -6% to -13% on all valuations. Why? The absence of latest comparable market data (no transactions, no data) and the macroeconomic outlook of a shrinking GDP and increased unemployment.
An Off-Market Properties Revival
Well-prepared buyers have been successful in materializing big savings on their purchase prices in the last three months (June-August).
For Eveline we found an historic apartment in Poble Sec that was listed for €240,000. After doing our homework and iterations of discussions with the agency and owner, the property was bought for €179,000 (August 2020). For Dave, we found an off-market 108m2 apartment in Eixample for €410,000 (deal price), which was valued between €451,000 and €490,000 by our big data tools and appraised at €440,000 by the bank. We found it before it came on the market and the owners understood that an attractive discount now was best for them. Olivier bought an investment property, renegotiated the contract during the lockdown and obtained a cash benefit equivalent to one year rental income.
Today it's no longer data, but expertise, a deep understanding of the market and a vast network that are the keys to getting the best deals.
The best deals are frequently not published. Sellers in need of cash like discretion and turn to their trusted network first. Having access to off-market properties is like having the opportunity to enter the shop a few days before everyone else during a huge sale. These are often complicated and long negotiations, but with preparation, a sound strategy, empathy and persuasion, we manage to lock in fantastic deals for our buyers.
Why Property Asking Prices Are Still Overvalued
Agencies compete for properties. Instead of competing by offering better service, agencies often over promise to the seller what they can sell the property for. In a normal market, they then downgrade the seller's expectations through the process of showing the property to candidate buyers. COVID-19 obliges them now to make a double correction: the over promise and the lower market prices. Many agencies don’t have the guts to give their customers this bad news and apartments stay listed at above market prices. Properties in Barcelona that were overpriced by 5% in March can now be overpriced by as much as 10-15%.
Strong buying activity in June and July caused many agencies to mistake accumulated demand for sustained demand. Many realtors assumed this was the "new normal" and are not recommending owners to lower their asking prices. Chances are real that these buyers are part of the demand that was put on hold during the lockdown, i.e. people buying shortly after the lockdown because they were going to buy anyway (e.g. the arras contract was already signed, they had already planned to move, a personal situation has necessitated a move). The economic outlook makes me think, however, that this is not solid future demand.
The dramatic drop in GPD in the second quarter of this year—essentially wiping out Spain's economic recovery of the past six years—has not been recognized by home owners. Spain's GDP will fall even more in 2020 (-10 to -15%, depending on the forecast) than during the previous crisis 2008-2013. Sellers, surprisingly, still underestimate the impact today's recession will have. Many sellers want to wait and see what will happen, what others will do. They would be better off by accepting a lower price today instead of waiting until everyone else starts to lower prices. The new outbreak of COVID-19 will prohibit a V-shape economic recovery and the economic crisis will last longer than the coronavirus. I expect September-January to be a very tough period; I believe it will be a time during which many companies will find out that they actually can't survive beyond the first wave.
Recovery might be faster this time around than for the previous crisis; Europe has acted as a club and has created a €750bn support plan. However, it is still undefined in terms of amount, timetable and distribution of funds. Realistically, with the recession, higher unemployment and uncertainty, many people will cancel their buying plans while others will need to sell.
How to Buy Cheaper
Deal prices are down already but are yet not visible. If you are serious about buying your dream home, an investment property or about changing from renting to owning, you should prepare well and start looking for opportunities. You should do so without rushing, with caution and a plan.
Raf Jacobs is an economist specialized in finance, a Board Member of the Spanish Association of real estate Buyer Agents, lecturer at University of Barcelona for the Real Estate Executive Program and is the Founder & CEO of Inspire Property Experts (previously Inspire Boutique Apartments), a real estate advisory firm helping you take optimal decisions and guiding you from A to Z when buying in Spain.