Spanish property bubble

The residential real estate bubble in Spain saw Real Estate prices rise 247% from 1997 to 2005 [ [http://www.spainrei.com/MiV-Spain-Property-Prices-95-07-yearly.htm According to the Spanish Ministry of Housing ] ] .
€ 651,168,000,000 is the current mortgage debt (second quarter 2005) of Spanish families (this debt continues to grow at 25% per year - 2001 through 2005, with 97% of mortgages at variable rate interest). In 2004 509,293 new properties were built in Spain and in 2005 the number of new properties built were 528,754 [ [http://www.mviv.es/es/xls/estadisticas/parque/pv21.XLS Number of new properties according to the Ministry of Housing in Spain ] ] . 2004 estimations of demand: 300,000 for Spanish people, 100,000 for foreign investors, 100,000 for foreign people living in Spain and 300,000 "for stock"Fact|date=February 2007; in a country with 16.5 million families, 22-24 million houses and 3-4 million empty houses. From all the houses built over the 2001-2007 period, "no less than 28%" are vacant as of late 2008 [http://www.cotizalia.com/cache/2008/08/28/noticias_50_900000_viviendas_construidas_inmobiliario_estan.html]

House ownership in Spain is above 80%. The ownership feeling was inducted by the government in the 60s and 70s, thus being deeply embedded in a Spaniard's mind. Apart from that, tax regulation encourages ownership: 15% of your mortgage payments is deductible from your income taxes, nothing if you pay a rentDubious|date=August 2008. Even more, the oldest part of the apartments suffer from non-inflation-adjusted rent-controls [http://www.jubilo.es/asp/pagina.asp?IDPagina=3360] and eviction is slow, therefore discouraging renting.

As feared, when speculative bubble popped Spain has been one of the worst affected countries. According to eurostat, over the June 2007-June 2008 period, Spain has been the European country with the sharpest plunge in construction rates [ [http://www.elpais.com/elpaismedia/ultimahora/media/200808/20/espana/20080820elpepunac_1_Pes_PDF.pdf] ] . Actual sales over the July 2007-June 2008 period were down an average 25.3% (with the lion's share of the loss arguably happening in the 2008 tract of this period). So far, some regions have been more affected than others (Catalonia was ahead in this chapter with a 42.2% sales plunge while sparsely populated regions like Extremadura were down a mere 1.7% over the same period) [ [http://www.lavanguardia.es/lv24h/20080923/53544998493.html] ] .

Banks offer 40 years mortgages and, more recently, 50 years ones. As opposed to the Ireland case, in Spain the labor cost does not follow the rise of the house market in the same proportionFact|date=August 2008. While some observers suggest that a soft landing, others suggest that a crash in prices is probable. Lower home prices will allow low-income families and young people to enter the market, however there is a strong perception that house prices never go down. As of August 2008, while new constructions have come virtually to a halt, prices have not had significant movements, neither up nor downwards. The national average price as of late 2008 is 2,095 euros/m2 [ [http://www.cotizalia.com/cache/2008/08/28/noticias_50_900000_viviendas_construidas_inmobiliario_estan.html] ]

Spain: An economic overview

The Spanish economy has enjoyed ten years of brisk growth and recovered swiftly from the recent international slow down. The main boost in activity came from fiscal consolidation, the fall in interest rates due to the introduction of the euro, EU grants and subsidies, structural reforms pursued since the mid 1990s and a surge in immigration have created a virtuous circle of rapidly rising activity, huge growth of the construction and real estate sectors and strong job creation. Consequently the standard of living differential with the euro area average, shrunk from 20% to less than 13% between 1995 and 2003 (Economic Survey of Spain: Policy Brief OECD 2005).

Overall 2004 ended with a mixed bag of economic results, growth was down from 2003 at 2.8% but inflation was higher at 2.5%. La Caixa Banks "Informe Mensual 2005" describes the building sector as the main pillar of the economy with 9.5% of Spain’s GDP in 2004. There is growing alarm over the possibility that the housing sector may be overheating. Further concern also stems from the fact that EU subsidies ended this year and will now have to start contributing (Spain was the biggest net beneficiary of the EU’s regional funds, to the tune of 8.4 billion euros in 2004, and according to the Economist magazine special edition ‘The World in 2005’, over 100 billion euros since 1990).

The building boom 1997 to 2004

The OECD 2005 highlighted that 65% of Spanish homeowners (compared to 38.6% in Europe) own their principal property outright. According to "La Caixa Bank’s Informe Mensual 2004", the increasing house prices (Fig. 1) in the last five years have had a "wealth effect", which led to a boost in confidence and consumer spending.

This “wealth effect” combined with the changes in socio economic factors, demographics, low interest rates and tax incentives for home ownership (Economic Survey of Spain: Stabilising the Housing Market, OECD 2005) have had a strong impact on the demand for new housing particularly through local and international property speculation. The Banco de España stated that from 1988 to 2003, the average return on property investment was 13.5%. This was higher than the stock market investments at 9% measured on the basis of the IBEX-35 index over the same period (OECD 2005).

The economy in 2004

Over 2004 unemployment remained wide spread (11% according to the Global Policy Network Global Labor Market Database, Spain 2005), productivity gains were meager at half a percent, inflation became relatively high, potentially eroding Spain’s ability to remain competitive on the European level. OECD 2005 report highlighted Spain’s lack of investment into research and development programs and training for their work force, and also stated that Spain’s economy runs the risk of being trapped in low technology industry. This fact has very important future implications when we review recent figures on labour costs and hours worked, which show how Spain’s traditional advantage over its competitors (Fig. 2) of low wages and long hours has been undermined.

Furthermore the “accelerated growth of the housing market with the doubling of value in real terms since 1998 makes domestic demand more vulnerable to higher interest rates” (Economic Survey of Spain, OECD 2005), this concern is also highlighted by the Bank of Spain and is of increasing concern to the government especially when the Spanish Mortgage Association expects that in the second half of this year, the interest rates will start to move up again to 4.75% by the end of 2006.

The current situation with the housing market

María Antonia Trujillo - Spanish housing Minister until July 2007cite news |title=Zapatero reshuffles Spanish cabinet|publisher=Financial Times|date=6 July 2007 | url=http://www.ft.com/cms/s/a16883d4-2ba3-11dc-b498-000b5df10621.html] - recently came under fire for trying to cover up the fact that growth in property was 17% over 2004. The nervousness at government level over the possibility that the economy may be overheating is founded on some pretty important facts. In 2004, 494,000 (La Caixa, 2005) new properties commenced construction, a higher number than Germany, France and Italy combined. Despite activity on the tourist hotspots the majority of apartments bought were by local Spanish speculators. There are currently three million apartments sitting vacant (although factors like population decline and the fact that second homes or holiday homes were also included, skew this figure OECD 2005),108,000 alone in the Malaga province. This has led to concerns over the widening gap between new homes (Fig. 3) that are occupied and the current number being built. Speculators are not yet nervous as the present conditions for finance are extremely favorable (Fig. 4) with interest rates now apparently lower than inflation for the first time in Spain.

Obstructive or outdated regulatory obstacles and low rent levels that are insufficient to offset the apparent associated costs (damage, unpaid rent, etc) encourage owners to keep their property unoccupied, maintaining the low level of supply of private rental in Spain (OECD 2005).

Interestingly, despite the glut of available property the number of 25 to 34 years old living at home with their parents has increased by 10% since 1990. According to the 2003 annual report of the Spanish Economic and Social Council, a massive 34% of Spanish adults who are older than 30 still live with their parents, and that the main reason for this is the high housing prices.

The average person in Spain with a mortgage is now paying fifty five percent of their wage on their principal or secondary home repayments, a 4.1% increase from 2003 (La Caixa, 2005). This level is nearly double the percentage that Spanish banks’ consider optimal. According to the Banco de España, Spain’s house hold debt is at record levels at nearly 600 billion euros and it is suggested that this is a direct result of Spanish people being forced to take on bigger mortgages to keep pace with the rising tide of the property boom.

The National Statistical Institute (INE) examined the social fallout during the third quarter of 2003 and found that 10 percent of families had what it called “great difficulty” covering monthly costs. A further 46 percent said they were also feeling the pinch. Fully 65 percent of those surveyed said they were unable to save any of their income.

Rising concern

There are two million people directly employed by the building sector and approximately another three million work in businesses related to it (La Caixa, 2005). An example of the far reaching consequences of this is the valuations industry, which has experienced a tripling in the numbers of employees over the last 3 years alone (Salvago Tres: Boletin Informativo El Mercado Inmobiliaro en Malaga, December 2004). A good proportion of Spain’s work force now relies on employment related to the construction sector or the service industries that surround it; and this has obvious negative consequences for the Spanish economy if the industry fails. Concerns from outside Spain have also been raised by the European Central Bank that recently warned about the possible emergence of a property price bubble in some euro zone countries. Concerns reiterated by ECB President Jean-Claude Trichet, "The combination of high excess liquidity and strong credit growth could in some countries become a source of unsustainable price increases in property markets," in a press release to the British Guardian newspaper in 2004.

Governmental reforms to cool the housing market

Despite the recent downturn in the level of new build (Fig. 5) the government would like to further curtail the boom to prevent collapse. On a local level the Costa del Sol’s clamping down on planning permission in 2003 and 2004 may be an indication of this. The growth forecast for property prices in Spain during 2005 did reach 12, while 10% was expected, and is expected to decline to more manageable levels of 5% in 2006.

Amongst Government reforms for the economy as a whole the main objectives for the coming years will focus on taming inflation, improving wage bargaining and competition, stimulating education and R & D and most importantly introducing reforms to cool the housing market.

To resolve the problems within this sector the government has created a new Housing Ministry to provide subsidies for home purchase by young people with low incomes and also introduced a 1 billion € emergency plan with the following tree objectives:

1. Increase supply of low cost housing by 65% with incentives to attract private promoters leading to a bulk of the increase in available of low cost housing for the rental market.

2. Boost demand and supply in the rental sector by providing:
* Assistance to tenants under the age of 35
* Grants to firms and bodies for the purpose of letting it
* Grants to private individuals letting accommodation for a minimum period of 5 years covering insurance cost and unpaid rents and property degradation
* A public rental agency in 2005 to ensure transparency and promote further development of the market.

3. Committee of experts is now looking into improvements in the legal relations between tenants and owners.

Further limit to the rise in real estate prices have been promoted by abolishing the auction of public land while a special commission will look at ways to increase supply of public land for the construction of subsidized housing.

Findings from the OECD 2005 report raise the concern that these measures do not go far enough. The report recommends that more focus should go on encouraging growth in the rental market, meanwhile abolishing the various forms of assistance to home ownership that have a high budgetary cost and debatable redistributive effects (more than 1% of Spain GDP in 2004 according to the OECD 2005). The report also concluded that a 50% reduction in the proportion of unoccupied homes would still leave Spain with a vacant housing rate above the European average but represent additional housing service supply of one and a half million dwellings, or the equivalent of three years production.

External links

* [http://property.timesonline.co.uk/tol/life_and_style/property/overseas/article1712024.ece Costas house price crash?] (The Times) 27 April 2007
* [http://www.moneyweek.com/file/29001/panic-hits-spanish-property.html Panic hits Spanish property] (Money Week) 27 April 2007
* [http://www.thisismoney.co.uk/mortgages/homesabroad/article.html?in_article_id=419706&in_page_id=505 Spanish property crash feared] (thisismoney.co.uk) 25 April 2007
* [http://www.moneyweek.com/file/28641/has-spains-property-bubble-just-burst.html Has Spain's property bubble just burst?] (Money Week) 25 April 2007
* [http://news.bbc.co.uk/2/hi/business/6592203.stm Spain hit by property crash fears] (BBC News) 25 April 2007
* [http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/04/25/cnspain25.xml Euro helps topple Spanish property] (Telegraph) 25 April 2007
* [http://www.kyero.com/price_index Kyero: 'Independent spanish property price statistics'] (July 2 2007)
* [http://www.thisismoney.co.uk/mortgages/homesabroad/article.html?in_article_id=420094&in_page_id=505 Mail on Sunday: 'The property pain in Spain'] (May 8 2007)
* [http://www.economist.com/PrinterFriendly.cfm?story_id=2137687 The Economist: 'Whose is the fairest of them all?'] (October 16 2003)
* [http://www.economist.com/finance/PrinterFriendly.cfm?Story_ID=1057057 The Economist: 'Going through the roof'] (March 28 2002)
* [http://www.spainrei.com/Spain-Property-Prices.shtml SREi: - 'Official Spanish property prices 1995 to 2007 and information about how prices are calculated'.]

ee also

* Real estate bubble
** United States housing bubble
** British property bubble
** Irish property bubble
** Japanese asset price bubble
** Chinese property bubble
** Indian property bubble
** Polish property bubble
* Martinsa-Fadesa

References