The following chart has been translated into English and includes rates by all the major banks that do business in Ibiza. Note the two columns: light blue for variable interest rates and light green for fixed rates (click on image to enlarge).

Note that these are the “published” rates and that many banks, especially the smaller local Savings and Loans, are often able to negotiate better rates than those appearing in the above chart. The rates will depend on 1) the amount of downpayment, and 2) the type of guarantee you can provide.

Why choose a variable mortgage over a fixed mortgage? I’m no mortgage specialist but I can advise you to consider the type of investment you will be making and to ask yourself the following questions: is this a short-term (2-5 years) or long-term (10+ years) investment? Will this be your primary residence? Do you want to take advantage of current low rates but risk paying more if rates go back up to the levels of 2000/2001? In any case, using a mortgage calculator, it is easy to find out using various scenarios at what point fixed rates become more interesting than variable rates.

Do take note of the commissions banks charge to open a loan and the fees to cancel/transfer it; for example, if you sell the house in a few years when the market has improved. Some banks will charge you as much as 1% of the value of your mortgage both when you buy and sell your home if you do so in fewer years than the term of your loan!

If you are a foreigner (non-Spanish passport holder), with or without residence in Ibiza, you will often be asked for a larger amount in downpayment to be approved for a mortgage loan — instead of the usual 20%, expect to pay between 30% and 40% down. And under the current climate, be prepared to add even a little more.

Source: El Pais, Sunday February 24, 2010

We are compiling data which will be released in an article to be posted next week (around January 27th).

It is what we believe to be the most in-depth analysis of home sales (new and previously owned) using data from the Ministerio de Viviendas.

Whether you are an existing homeowner, a prospective buyer or a real estate professional, do not miss this article. See you soon!

Interest rates and mortgages work hand in hand.

The European Central Bank rates have been spiraling downward since October 2008. Hence, during the same period but with a slight delay, mortgages have been dropping as well. At their peak, during the summer of 2008, the Marginal Lending Facility rate (the one that matters to mortgage owners) reached 5.25%. Prior to that period, from June 2003 to July 2008, rates had risen steadily from a pre-crisis low of 3% to their 2008 highs making mortgages increasingly expensive.

(click chart to enlarge)

Lowering rates makes existing mortgages more affordable (if you have a variable rate mortgage) by reducing the amount of interest on the loan you need to pay each month. More importantly, it has been used to stimulate the economy by encouraging people to borrow money to buy homes and cars. And the purchase of a new house typically generates additional purchases of things like furniture and appliances, further helping the economy.

However, this time things are different. The crisis has been caused by lax and careless lending practices. Banks lent money to people who are unable to repay their loans (risky borrowers) and as a result, many have defaulted. Look at the financials of any bank and you will see what is commonly referred to as “impairment losses” (relating to asset devaluation). Interestingly, both the Financial Times and the blogosphere believe Spanish banks have NOT been writing off bad debts and are not as solvent as they appear to be.

Banks on a global scale have been hard hit and the lower interest rates have been accompanied by much tighter lending requirements imposed by both the federal Reserve in the U.S. and the ECB in Europe. So what’s different? The lower interest rates have provided very little boost to the economy because of the lack of liquidity. Even if you wanted to buy a home and had 50% of the purchase price as a downpayment, most banks could not offer at mortgage.

On a positive note, interest rates are still historically low (same level as May 2009), making mortgages – if you can get one – very affordable right now. If loans become more accessible – to qualified individuals, of course – the 7% to 12% drop in real estate prices combined with lower rates will make it a very interesting time to buy in Ibiza!

Watch for an upcoming interview with Sa Nostra, one of the largest savings banks headquartered in the Balearic Islands. We will be asking them for their outlook and perspective on impairment losses, interest rates and real estate in Ibiza.

Source: European Central Bank (http://www.ecb.int/home/html/index.en.html)

The financial/real estate/mortgage crisis started in 2007. As far as Spain is concerned, it has been 27 months of job losses, the highest rate of mortgage defaults in history and banks unwilling to write off bad loans… yet people worldwide are still googling “Ibiza real estate” and more Spaniards than ever! Those searches cannot all be purposeless – they are from real, prospective buyers albeit fewer than three years ago.

We are well off the highs of Summer 2006 but taking into account the seasonal fluctuations, the number of Ibiza home-related searches are only down by 22%. By volume, 2009 saw approximately 47% less people than 2006 searching for such keyphrases. The flipside is that people are still searching for homes here on the island!

As Nicholas Clayton stated in his Ezine article “Ibiza buyers are not stupid,”  the White island (as opposed to the White Coast) has not been affected by the tremendous migration of Brits, semi or fully retired, to the coasts of Costa Blanca. There is no market in Ibiza for semi-detached “holiday” homes barely large enough for Hervé Villechaise (may he rest in peace). So Ibiza has less to worry about than places like Benidorm or Torrevieja.

Source: Google Trends

The first post in this blog tackles the question “What’s happening to real estate prices in Ibiza?”

In addition to very strict new construction laws, Ibiza has a limited amount of space (571 square kilometers to be precise). Take away several hundred square kilometers of protected land, parks, natural reserves and land pegged as “rural” and you are left with very little buildable land.

Like many other islands – and places like San Francisco, surrounded by water on 3 sides -  there is nowhere else to go. That is… if you WANT to live there. And many people still choose to live (or own a holiday home)  in Ibiza. Why? That will be answered in an upcoming blog.

The supply of housing is limited by geographical boundaries, in this case H2O, and a government which is increasingly obstinate in allowing new construction. Furthermore, the wealth of many developers will keep new construction prices prices from dropping further. They are already down a high of to from 3.631 euros to 2.731 euros during the last quarter of 2009.

My brother-in-law recently inquired about a flat in the Talamanca area hoping to use the crisis as an excuse to “fetch a deal.” The developer answered that he had no need to lower prices or to sell; he’d rather sit out the crisis and put the units back for sale when the market picks up. Bad for my brother-in-law but good for the local real estate market.

Quoting from an article which appeared in the Diario de Ibiza, Ibiza ranked 21st most expensive out of 73 Spanish cities with a population of 50,000 or fewer inhabitants. The price per square meter for new construction is 2.165 euros, a drop of 3.8% versus 2008. Yet the Spanish average for this same time period was 6.3% (65% higher).

With an average price per square meter of 2.837 euros for second-hand housing, “Ibiza is the most exclusive municipality of the Balearic islands” states the Diario de Mallorca. Idealista.com says previously-owned homes in the Balearic Islands fell an average of only 0.3% during the fourth quarter of 2009.

My own analysis of actual Q4 2009 sales from data available at the Housing Department’s website (Ministerio de Vivienda) shows average prices for the municipalities of Ibiza and Santa Eulalia of 2.471 euros and a drop in property prices of 2.7% over the third quarter (for 128 homes sold). For a much more comprehensive analysis of real estate prices, please read my upcoming post.

Are prices going to drop further? My crystal ball says “Reply hazy, try again.” I think prices are likely to fall another 2% to 3%, then remain flat for a quarter before seeing a slight increase during the Summer of 2010. Demand for second-hand homes (but no so for apartments) remains strong but buyers don’t have access to liquidity. The sooner banks facilitate financing, the sooner we’ll see this demand being filled… and then prices will catch up. Obviously, the basic laws of supply and demand will continue to dictate prices.

Sources: Diario de Ibiza, Jan. 5, 2010 | Diario de Mallorca, Dec. 29, 2009 | www.idealista.com | Ministerio de Vivienda