Friday, June 15, 2007

I’m Forever Bursting Bubbles

Has the property bubble in Spain finally burst?

The stock market took a dive a while back as investors sold property stocks in anticipation of an end to the boom. And now it seems as though the harsher realities of the market are about to hit home. I spent some time this morning speaking with some local estate agents. There is some “difficulty” was a comment on more than one occasion. For difficulty, read lack of sales.

Fact is that there is a glut of speculative development, a general view that property is overpriced, some concerns over legalities and also interest-rate rises.

Much of Spain’s recent economic boom has been based on the construction sector. The downturn in the market threatens, it is said, two out of five construction companies. As the boom has lasted, more and more players have come into a market - across the sector - eyeing strong returns. But no boom lasts forever.

Despite this, it is also being said that a drop in prices may not feed through for at least a year if not longer. Perhaps so, but there is one factor that may hasten this. It is not uncommon for people to buy a new house with an existing property (and mortgage) acting as a form of collateral, so to speak. While the intention may be to sell the first property, there has not always been pressure to do so, especially if the market is buoyant and interest rates are reasonable. Take these elements out of the equation, or rather replace them with instability and increased mortgages, and the pressure to sell - at a lower price - becomes a likelihood. It is also the case that consumer debt in Spain is over-leveraged (in other words, people are too stretched, even by comparison with the UK). It may sound remarkable to UK readers who will be aware of the apparently disproportionate house-price to salary ratio, but the ratio of house prices to wages is above that of the UK.

For the potential buyer, therefore, this could all be good news, though the potential volatility - at least in the short term - may mean buyers holding off. Whether this market shift also affects Mallorca as much as the mainland is another question, though - as some estate agents are suggesting - “difficulties” are already in the system.

On the other hand ... Back in 2002 I distinctly recall it being said that prices would come down within a couple of years. It was argued that prices then were inflated, largely as a result of the introduction of the euro. Well, that is no longer an issue, and it could just be that the property market, as then (when prices kept going up), turns out to be more robust than is being suggested. But the euro remains an issue in one very important respect, and this is - arguably - the nub of the whole property story. Spain entered the single currency with an exceptionally low interest rate, which the European Central Bank seems likely to increase. Interest rates have been below inflation rates, thus creating the circumstances for boom.

The Bank of Spain is saying that there will be no crash, placing faith - in part - in the level of immigration to buoy demand. The Bank’s main concern lies with the financing arrangements of the leading construction companies, which also means the lending arrangements of the banks.

Quiz. I’m not letting you off. It’s a great question, yesterday’s, so another day at least ...


N.B. Acknowledgment due to for some information in compiling today’s piece.

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