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What Happens Next? - Tourist renting during the next 10 years

In my previous article I noted (approx) -

1997: Availability - 400,000 properties. Tourist Arrivals - 47 million. Demand - 21 weeks per property

2007: Availability - 1,200,000 properties. Tourist Arrivals - 59 million. Demand - 4.4 weeks per property

175 million arrivals are required to fill the currently available properties for 21 weeks and this equals the combined arrivals for France, Spain and USA - the World's Top 3 Destinations!

Obviously this creates a serious problem for property owners who rely on rental income to pay costs or mortgage repayments.
Where such reliance exists the best advice is to try to find a long let, if the rental resolves the situation, or to sell as quickly as possible and, if necessary, take a loss.
In the medium term interest rates will rise and the rental decline will continue.

Since entry into the European Single Currency System the Spanish government has followed a policy of encouraging home ownership and currently the percentage of Spanish home owners is now the highest in Europe. Many (Spanish and foreign) buyers invested in 2nd and even 3rd homes.

This was a fatal mistake because the demand for new property and availability of cheap financing fuelled the boom and there are now an estimated 3 million unoccupied properties in Spain and may borrowers have commitments that exceed 50% of their income.
Additionally, the inevitable increase in interest rates plus the winding down of the construction and tourist industries (which will increase unemployment) is expected worsen the situation.

How serious Spanish Property Problem?

The United Nations dispatched a special envoy on adequate housing to report.

Financial Times: The Spanish Property and other Bubbles. The article suggests that devaluation would provide a quick solution to the crisis that is facing the whole Spanish economy but that is not possible within the Euro. They have to do it the hard way.

How will the Spanish Government resolve the Housing Crisis?

There are lots of remedies being discussed. This article is only concerned about tourist renting but looking at solutions generally -

Fiscal Incentives - Increasing taxes on non-rented properties and easing those for renters. The Tax Authority already seems to be moving on this as the 2006 declaration now requires the catastral reference of the tax-payers abode.

Increased Subsidies for Low Price Housing - Refining the VPO system.

Legislation Governing "Abusive" Property Speculation - A difficult one!

Controlling Corruption in the Real Estate Sector - This is already underway, members of the Marbella Administration are in prison awaiting trial for real estate kickbacks and a "Special Prosecutor" has been appointed to combat corruption.

Subsidised Accommodation for Immigrants - In real terms there are not so many immigrants to house but every little helps.

Support for the Tourist Industry - Training, subsidies, quality control and promoting Spain as a tourist destination. My view is that this will be the main short-term effort. Another 10 million tourist will quickly fill a lot of properties, reduce the property surplus and help the economy with their tourism spending.
They quickly boosted tourism after the crash of the 90's and could easily do it again.
The self-catering sector has equal recognition with the hotel sector.

Promoting Cheap Tourism - People from developing economies in eastern Europe can now afford to travel. During the 90's we had Russians and Czechoslovakians arriving in coach-loads to stay at cheap apartments.

Regulating and Controlling the Self-catering Sector - Any remedies are sure to cost taxpayers money, they would want to make sure that taxes are collected (especially IVA) and that only taxpayers received the benefit. See my article Watch you back! How the Spanish authorities could react to the problem.

How long will it take?

That is very difficult to calculate. They have to first stop the slide and stabilise rents and real estate prices at the lower levels.

The Ministry of Tourism moved quickly before, so I would guess that we will start to see an improvement as early as 2008. The problem has so many facets that it is likely to be a long and difficult task.
Jos Maria Aznar's right-wing government worked quickly in the 90's to improve the economy, reduce unemployment and take Spain into the Euro system.

Now we have a Socialist government.
Perhaps we won't see any real improvement until the next election - in 2008.

My best guess is that it will take at least 5 years to fully resolve the situation.

The next article in the series: Making the best of it - advice for property owners who rent!

Mike King July 2007

ABOUT THE AUTHOR: Mike King has lived and worked in the Moraira Area since 1971. Currently he manages Villa Holiday Services of Moraira, a rental agency that specialise in Villa Holidays in Moraira and Property Sales in the Moraira Area.
Mike is also responsible for a popular advertising and information website about the Moraira area.

Links to other articles about Spanish real estate and renting.

1. Spanish Real Estate - A Crash or some Adjustments?

2. Spanish Real Estate - The Future.

3. Spanish Real Estate Survey - The Most Popular Areas could be the Best Investment.

4. UK Tax Amnesty for Owners of Holiday Homes

5. Tourist Rental Income 2007 - What's gone wrong? Overview of the situation.

6. What will happen next? Spanish tourist renting during the next 10 years.

7. How the Spanish authorities could react to the tourism crisis.

8. Making the best of it - advice for Spanish property owners who rent!

9. Property Values and Tourist Rental Income - Written in 2004. A very long article which foresees the present economic depression.

10. Spanish Young Persons Rental Subsidies.