Magiconomic days are over and blame game has begun

By Jeff Randall
The UK housing market is past its peak and heading south. House prices went up by about 150pc in 10 years, wages by a small fraction of that. An idiot in a hurry could see that the maths didn't work, yet experts kept insisting that demand would force prices ever higher.

The demand was there, I agree. As an abstract concept, it still is. But in order to fulfil demand, consumers need the ability to pay. The average buyer didn't have £200,000 stuffed in a jam jar, so he borrowed as much as he could. Not any more. The credit crunch has kiboshed super-stretch mortgages.

This lifts the curtain on an important part of the Brown Boom deception, which was that rising house prices made us all richer. It seemed like free money; it wasn't. Unfortunately large numbers of headstrong consumers behaved as if it was, sucking out equity from their homes to finance consumption.

Those who traded a chunk of bricks and mortar for a blast on the beach are about to feel much poorer. The money has gone. So have the tan and the feelgood factor. The debt, however, remains.

The Bank of England reports that nearly one million families are struggling to meet mortgage commitments. Rising interest rates have increased collective mortgage bills by £3.6bn. As household budgets come under pressure, one in 10 borrowers is taking on even more debt in order to stay afloat.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/19/ccjeff119.xml

As my partner and I are keen gareners, we are seeking a property with a lot of land. As all prime location properties in this class are already taken and way beyond our financial means, we are looking at locations that are aside of the tourist trail. We've been looking in the inland parts of Valencia and Alicante where we have seen some beautiful spots at very modest prices. Of course we must also factor in the costs of renovating waht is essentially a ruin and also procuring water and electricity.

At the monet we're not seeking to invest immediately but are still looking around for the perfect place. We've seen many acceptable places of well over a hectare for under 30,000 Euros, which is the sort of money most people can easily borrow without having to calculate the risks, or can even save up if they put in some effort. Add double that amount for the renovation, but you don't have to do that in one go - and you're in business.

This may not be the location, location, location, approach but it is affordable and we're not seeking an investment, we just want to have a nice place to spend our holidays and I don't really care what its worth once I've payed for it.

It's all this thinking "get rich by working the property ladder" that is the cause of this problem and its bound to collapse at some point.

If you've got money to spare, invcest it in shares, in a business or something similar. Your property is part of your quality of life. Pay the price that it's worth to you. Don't see it as your key to getting rich. You won't get rich that way, those days are over.

Another rather ominous development is the pounds collapse against the Euro this year. Since the middle of the year the GBP has depreciated by nearly 10% against the Euro. This means british buyers are faceing a 10% increase in the price of Spainish property, even with prices flat.

Sterling is falling as markets anticipate a dramatic slowdown in residential property prices next year in the UK, and the BOE is forced to slash interest rates to prop up the economy. And I thought it was the BOEs job just to target inflation, more like trying to save Brown's backside.

For goodness sakes; anyone reading through this could end up suicidal! Please lets keep this in perspective, there is certainly going to be a slow down in property sales in both Spain and the UK; my view? Good - it will hopefully cause the demise of all the cowboy agents and developers that have proliferated in Spain for all to long and in the UK hopefully bring some semblence of sense to property prices! UK property prices are totally unreal, my own UK house is now 'valued' at a figure that if I didn't already own it I could certainly never afford to buy it! 

I suppose the big question for Spain is just how much is the market going to slow? I confess it was a concern, so much so that for the first time ever we were going to exhibit at the UK property shows having previously always relied on referrals from existing customers; I needn't have worried. What we are doing is giving a guarenteed 1-40 euro exchange rate to the pound, ouch! But we can suffer that and we are busier than we have ever been, our presence at the UK shows has been cancelled!

Yes things are going to be 'tighter' than they have been historically, much tighter but please lets keep this all in perspective; ask yourself these questions, 1) Can you still afford to eat next week? 2) Will you still have a roof over your head in 7 days time? 3) Are you and your family in good health? If you have answered yes, then what else really matters?

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/28/bcnspain128.xml&CMP=ILC-mostviewedbox

This I think proves my point that Spain is technically bankrupt.

.......It may equal the taxpayer rescue of Northern Rock in Britain, and possibly exceed it in proportion to the overall size of Spain's economy.

The key difference is that the ECB rescue operation in Spain has been disguised. A veiled method is necessary since the eurozone lacks a clear-cut lender of last resort. The IMF has warned that this gap in the architecture of of the single currency could prove serious in a crisis.

Traders say the Spanish authorities are quietly turning a blind eye to use of the ECB window, and in some cases may be encouraging banks to go to Frankfurt - a claim denied by the Bank of Spain.

Moody's said the total issuance of securities by Spanish banks last year reached €143bn, up 55pc on the 2006. Over €62bn were mortgage securities. The agency said the default rate was likely to rise, with mounting concerns among participants over a possible "housing crash". Some of the mortgage securities have already begun to draw on their reserve funds.

David Owen, Europe of Dresdner Kleinwort, said Spain could face serious difficulties this year as the excesses of a decade-long boom finally catch up with the country.

"The size of the Spanish corporate sectors financial deficit is truly is really scary. It rose to 14.5pc of GDP in the third quarter of 2007 from 10pc in the first quarter. This must be a record for a relatively large economy. Clearly this is not sustainable. Cost imbalances have a nasty habit of unwinding, quickly and very painfully," he said.

Mr Owen said Spain was acutely vulnerable since it cannot cut interest rates or let the currency slide to cushion the downturn. "Several years of no growth could now beckon. It will be very difficult for the economy to pick itself up again inside EMU," he said.

Spanish corporate debt is now 112pc of GDP. The current account deficit is 10pc of GDP. These are both flashing red warning signs.

Among those issuing mortgage securities in the last two months are BBVA (€4.9bn), Caja Madrid (€2.4bn), Caja Catalunya (€1.6bn), CAM (€1.4bn), and Caja Castilla la Mancha (€800m).

Hi TJ, how are you ? This was just posted 3:55 PM today also, here.

Spanish Government hides their banks troubles
started by michael52

Hi morerosado

Good thanks, how are you. You are very quick on the draw, I see its the same article.

Its interesting to see, but ECB debt is diverging in price, ie German debt is less expensive than Spainish debt. This should not be possible as it is all the same euros. However the market is voteing with its feet and trying to avoid risky countries in the EU. It also signals that people are taking bets on the fact that the Euro may not survive.

In the past countries like Italy and spain would trash their currency and deflate out of trouble. Now they are in the Euro they cannot. Its an accident waiting to happen.

flyingcat

The euro is indeed very strong against the pound, but unfortunately this strength does not reflect the strength of the eurozone, rather the dramatic weakness of the dollar. As people flee the dollar they go to the euro, not because the euro is healthy, but because after the US dollar its the next most liquid currency.

Sadly for the eurozone a strong euro is rather bad news. It means the eurozone becomes more and more expensive to the rest of the world, so exports from euroland become very uncompetitive. Infact so much that Sarkozy has said that euroland;s largest business is almost unviable (airbus).

A strong euro is pushing down growth in the eurozone and threatening recession. Unfortunately the ECB is reluctant to lower rates as inflation is rampant and above their target, (check out the increases in energy food etc).

A strong euro against the pound has also in six months made Spainish property around 10% more expensive to Brits, at a time when demand is falling off a cliff.

You ask why worry about the Spainish economy and their banks:

The answer is that if there is a big failure in the banking system, credit/mortgages will dry up completely. I don't need to tell you how much property will be worth if you can't get a loan on it!!!

Also governments in time of trouble will look to tax the relatively wealthy. Do not be surprised to see draconian measures taken against Brits to give to the local population. I have noticed that Spain is very nationalistic and highly protective.

I wrote this about the UK but sadly it applies even more so to Spain. House prices in the UK maybe very inflated, but atleast there are some fundamental factors to support them like high relative wages, lack of building etc.

Spain has none of these supportive factors, wages in Southern Spain are third world, and there is more land than you can poke a stick at. The spainish boom is a direct result of the boom in prices in Northern europe and as a result of massive credit expansion.

The following will perhaps explain why the UK and euroland have had such an apparent strong economy for the last decade:

The labour government has created the worst credit boom this country has seen, something that seem very ironic when you consider that Brown came to power based on his prudence theories.

The public it seems is only just catching on to the truth, probably most are still unaware of the laws of economics. Brown continually harps on about 10yrs of uniterruped growth etc, without telling people that this is what happens every time when you have 10yrs of uniterupted credit expansion.

The simple way to think about is to imagine what would happen if you personally went on a credit binge. For a minute imagine loading up on all the debt you could and then going on a spending spree, buying a new BMW X5, going on a luxury cruise, having an extension built, getting the kids the latest xbox, psp etc. You get the picture its happening in a place near you.

Friends and family would likely marvel at your good fortune and new found wealth. Rumours would abound about promotions perhaps, or investment skill. You would likely find yourself the object of admiration and certain envy and you might indeed appear quite clever.

Unfortunately it would all likely end in tears, and for a few years of the high life you would have a decade of poverty. How long the illusion of prosperity would last would depend on a few things like your skill at juggeling debt and finding new sources of debt, and the extent of your extravagence. Also what you squandered your cash on. Holidays are gone, but atleast a few things could be sold, ie property and cars, altho most things probably pennies in the pound.

With countries the boom can last a lot longer, as they are bigger than any individual, but the effects and the result are the same.

What we are observing now is the peak of the slope of the positive effects of debt expansion. Once you get over the top (mid2008) you start on the negative slope, where everything works in reverse. All that was positive on the way up, becomes negative on the way down.

What is really interesting is that if a governement wants to turn an ordinary recession into a depression, all it needs to do is get out its usual arsenal of recession avoidance tricks. Intervening to prop up houseing mkts, banks, anything to boost consumer spending, increasing unemployment benefit, propping up wages, minimum wage etc.

It seems bizare that a governement would not want to try and help in these situations, but history has shown that not only does it not work, but that it makes things much much worse. The reason is always that the whole system is prevented from cleansing itself.

We all laughed out loud when Bernanke was nicked named helicopter Ben, but how many actually though that anyone would be stupid enough to do it. It just happened ffs. The tax rebate is a disguised and modern version of the helicopter drop. The governement does not have a wad of tax money to give away, its in deficit too.

Imho history will not judge Brown kindly, but of course by then the damage will have been done and it will be too late, perhaps the best that we can hope for is that he is still in the hot seat as it all becomes apparent. Small compensation I fear.

Unfortunately the decline in moral standards and behaviour, rise in crime and drugs etc is all part and parcel of a consumer debt driven society. The two are inextricably linked.