There are few certainties in life but one of those is that you’ll see Mallorca on top rank for real estate price levels, yoy price increases, rent price levels and so on. While this is often acclaimed by the industry as a winning point to attract buyers and real estate agents to cheer, I believe that second round effects will continue to escalate and growing louder on the debate in society, exacerbated by coming economic crisis.
Mallorca is an island with different microcosms, spanning from rural and mountain areas to sea front area dominated by small towns to the large Palma area that has grown in importance during the last years, following the urbanization trend common to all big cities in the world.
But before moving on, is there a way to define affordability for real estate? Well, usually a renters cost-burdened is someone spending more than 30% or more of their income on rent. Sound familiar?
Initially, the buying approach is the first one to discern: basically there are two options, buying a new development or moving to second hand market. The most requested unit is a two bedroom apartment, usually around 70 sqm, adapt to the normal needs of small family. Researching current offer in Palma area and moving also outside Via de Cintura, you could find some large developments, not premium but good quality, where a single unit is available at about 250.000 euro (the cheapest one). Simple math: a client need to have at least 30% of the listed price in cash (20% equity and 10% for taxes), hoping to access to a mortgage for the remaining part (so having stable job, meeting different ratio requirement as 30% ratio of income/monthly payment, etc.). Basically at least 75000 euro are needed to buy a new property: mortgage rate with those crazy low rates are really accessible if locking life lasting duration. Moving to second hand market, this is typically cheaper but in the last years the spread versus new products tightened a lot (particularly for reformed assets) so not a world changing decision. The basic impression is that for a lot of people, principally first-time buyers, without dad and mum’bank, buying is not an option.
In this piece I would like to concentrate the analysis on Palma, that, with its more than 400k habitants, exemplifies all the problems of affordability and being the place to be to find a job, access to large services and lifestyle, I think will attract large stripe of demand in the future. Doing a price analysis, discovery and getting some clear reference prices is particularly complicated and a lot of research and attention need to be done to arrive at the right conclusions. I’ll try to give some insights of the current prices: new developments are priced from 3500 to 4500 euro/sqm with large variation due to location, while looking at different price sources, I got an average price for Palma area of 3055 euro/sqm at may 2020 (Idealista) with a yoy growth of about 5%. Some other data depicts an average listed price per unit of more than 500k euro! Looking at current offer listed on the same portal, I got a stunning 3700 euro/sqm. First consideration: listed price are usually inflated of a 10-20% (someone like Antoni Gayá, the president of the Association of Real Estate Services, talks about a 20-30% range), transacted prices give a more transparent view. Second consideration: I’m not a big fan of average numbers, at least not without a deep and clever analysis of the population. Including properties with large price range means comparing products in area and with features totally different. A large part of the actual offer is skewed towards luxury and large buildings, priced also at more than 8000 €/sqm and with sea view premium of 30/40%. So in a range price below 300.000 average price fall to 2500 moving upward fast to 3000 level if hiking the range to 500k level. Just to give an idea, 1mln plus range is priced at 5500/6000 level.
Third consideration: the supply under 260k level is less than 25% (Palma is well supplied for rich people..).
Palma is the third most expensive city in Spain, reaching maximum historical prices and exceeding 2008 levels. But what makes extremely painful for people satisfy housing needs and amplifying the affordability issue, marginalizing a growing segment of population, is the economy landscape. Average salary is more than 20% below Madrid or Barcelona levels, implying a maximum effort for Baleares citizens to cover housing costs. Why this? Well, the economy of the region is scarcely diversified, principally service based with really few industry, large part of low-skilled jobs working for seasonal sectors and few professional and managerial positions or middle-high income earners. The market is not adjusting in terms of price but reduced number of transaction post 2017 peak means that the mismatch is growing. I don’t want to digress now on the multiple reasons that caused this crisis (a long dedicated chapter will be needed) and why so few has been done to solve it, if not praising moderation and verbal ammunition. Basically there are clearly bifurcated categories within the real estate, addressing resident or tourism/second houses/foreigners.
Ok, easy, why not to move to rental? Surprise surprise, rent price skyrocketed about 50% in the last few years. Obvious consequence but the supply is so scarce and often of low quality that the only option is move to suburbs or share a flat. Price of a studio in Palma reached a floor, rarely finding offer below 800 euro also in b-side boroughs. With a price level around 13 €/sqm in Palma and an average price of 1300 euro monthly, it clashes with an average gross salary of less than 2000 euro. The housing crisis hasn’t an immediate solution, more forces and action need to be addressed to do it and no one could work in a short term period. A lot of errors had been done by regulators, players in real estate, central bank policies and so on. Politics, administrations and real estate association are aware of the current dramatic situation where middle class is squeezed out while measures as VPO units and economics aids address only the poorest people. Appreciable the White Book issued by CAEB (Baleares Developers Association) trying to propose initiative to cooperate and reduce the affordability crisis.
Is there any other solution or way to act in short term at least on the rental market?
Well, I believe that innovation and technology could ease the pain and new players could address growing needs and trends of a large part of the population that desires to access to urban lifestyle and opportunities, experience the vibe at cheaper prices with a layer of services included, having flexibility and skipping transaction costs. Alternative living ways solve also social issues like loneliness and arrange like-minded people: co-living is a growing trend in worldwide cities and in the next chapter we will explain why is a win-win proposition for tenants and landlords and why we’re working on this project in Palma. Palma is much more than a touristic city famous for boats and beaches, it’s time that it transform in a smart city to attract and accommodate next generations.