I hardly use the car nowadays (2000 kms between annual services - what the hell do I even keep it for?) but a full tank of diesel which used to cost me €50, last fill up was €70. Quite a big rise, for sure. Also have noticed the electric bills creeping up, but otherwise, no, I can't say I've noticed it too much either. But then I rarely pay much attention to how much the supermarket bill comes to - after all, you have to eat. We buy very few luxury items, just the basic necessities, but we eat very well, ¡gracias adios!

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Hey TJ noticed this today in the Telegraph today

Monetarists warn of crunch across Atlantic economies

The lifeblood of countries' economies is draining away - with grim consequences for us all, writes Ambrose Evans-Pritchard

www.telegraph.co.uk/money/main.jhtml 

he goes on to say :

"The key measures of US cash, checking accounts, and time deposits - M1 and M2 - have been contracting in real terms for several months. A dramatic slowdown in Britain's broader M4 aggregates is setting off alarm bells here."

I thought the Fed/ECB were flooding the market with cash, how can the money supply be shrinking? Also most Spanish say to wait a year or two for the worse to happen, most people are surviving but just barely.

And more bad news, any wonder N.E.W.S. stands for Negative Emphasis of What's Seen

www.telegraph.co.uk/money/main.jhtml

This message was last edited by Rob in Madrid on 7/11/2008.

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I heard somewhere recently that N.E.W.S derives from the four compass points.

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No you are correct, it's just I heard someone refer to the news that way and I never really forgot it. In America they tend to say in regards to the news "if it bleeds it leads!"

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he goes on to say :

"The key measures of US cash, checking accounts, and time deposits - M1 and M2 - have been contracting in real terms for several months. A dramatic slowdown in Britain's broader M4 aggregates is setting off alarm bells here."

I thought the Fed/ECB were flooding the market with cash, how can the money supply be shrinking? Also most Spanish say to wait a year or two for the worse to happen, most people are surviving but just barely.


Rob - your question is a really good one and shows you have been paying attention lol!

The issue over inflation vs deflation is a complex one and not even economists agree. I intially found it difficult to understand how we could be on the verge of inflation and defaltuion at the same time, when one is the polar opposite of teh other.

The answer is complex ,but not when you understand why its critical to understand it all depends on what you are using as your measuring stick.

For example govenments like to distort the figures on GDP. The US tells us that they are not in recession as GDP last quarter grew at .6 % so an anualised rate of 2.4%.

However there are lies damm lies and statistics. You have to back out inflation from growth figures otherwise you are just measuring inflation. By taking a very low rate of inflation you can make the GDP figures positive. But in reality we have inflation of a min of 6%, so backing this out of the growth figures gives us a negative growth number, ie recession, which funnily enough is how everyone feels it - go figure!

The US has been expanding its money supply for years, but mainly M3 which is largely private and corporate debt. This money has to go somewhere so its nonsense to suggest that money supply figures are not important. Sure we had many yaers of low inflation growth, but that does not mean that we had no inflation, as I said teh money had to go somewhere, and it went into the stock market and houseing.

The fact that we chose to ignore house price inflation from the inflation stats and see this together with stock prices going up as a good thing ie good inflation is just ignoring the truth in favour of what you want to see. Ask first time buyers who couldn't get on teh housing ladder and see if they saw it as good inflation?

Once the stock market buuble burst and so did the housing bubble, then this money transferred to commodities like food and energy as people looked to invest in hard assets to protect their wealth form inflation.

Now we have the same inflationary forces, but its seens as bad inflation, funny that. A loaf of bread going up is bad inflation, but housing going up is good inflation. In reality its all the same, and all bad news.

So to get back to inflation/deflation we have both. Inflation in real goods and services such as food and energy, and deflation in housing and equities. We are heading rapidly for stagflation which as you know is really bad news.

Noone who has an understanding of these issues should be very surprised. There are no long term good effects of inflation and no country has ever sucessfully inflated its way out of trouble, and yet that is what we are trying again. They all end the same way, in teh opposite of prosperity, poverty. This one will be no different, but it will hit some people much harder than others and there is a lot people can do to minimise the effects.

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"......it will hit some people much harder than others and there is a lot people can do to minimise the effects"

Waiting with baited breath for the next chapter!
I for one would love to know what we can do to minimize the effects, please!

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Well I would tell you but you will have the most God almighty hangover tomorrow and they wont really have gone away.

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Sounds like you believe in the Gospel according to Douglas Adams? 
I love the part in HHGTTG where Ford orders loads of pints for himself and Arthur, explaining to the barman that the world is about to end. The barman asks if he should do something, like put a paper bag on his head. 
Ford says "If you like". 
Barman says, "Will it help?"  
Ford: "Nope!"

Something like that, anyway. It's along time ago, but I do remember that the answer is 42!!!

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Hi TJ thanks for the reply. Came across this article the other day in Business Week

Credit Crunch expected to last a full generation

www.businessweek.com/magazine/content/08_30/b4093023467572.htm

To quote

Why hasn't the healing begun? The answer lies in the mechanics of leverage, or borrowed money, which banks not only provide to customers but also use themselves. Leverage is a powerful but dangerous tool, intoxicating on the way up and devastating on the way down. In other words one feeds on its self. Take the housing market, during boom times you want to get in as fast as possible, saving for a down payment isn't realistic because house prices increase faster than your savings do. When the reverse happens people (like us) sit out the market waiting for prices to go down. When we do make offers it tends to be ridiculously on the low side.

For example my Wife and I are looking at houses north of Madrid and my starting point is 50% of the current price. Well if the owner doesn't like it I can continue to rent for an extra year and wait, nothings moving and most Spanish are over extend by a large margin, I can afford to wait.

One of my students who works in the capital markets says we are were the US was a year ago. He expects that Spain will see a US style housing meltdown. Long term the economy will recover but personally Spain is so overbuilt house prices won't.

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why don't you build your own home?

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Rob

Interesting and I think you are very wise. The market is as you saturated so you can afford to chuck in silly offers and walk away. In a short time people who have been holding on will be forced to get real and appreciate that the fact that they overpaid massivley for their house does not mean that you should also pay too much also.

My guess is that houses will go lower than the cost to rent them. So for example if you rent a 2 bed apartment long term at Spanish rates of lets say 500euros a month then the price will fall to (500*12)/0.07 ie 85K euros. using 7% as a realistic yield, probably a little generous maybe shoudl use 10%.

Basically you should be able to finance the property at less than it costs to rent it. this is the historical norm. In most areas I see this suggests that property is still around 50% overvalued.

I think there are two choices for western europe, we either keep low rates and head towards stagflation and posibly hyperinflation or we tackle the debt inflation issue and put rates up to high double digits to purge the debt. If anyone thinks this is a little extreem then this is exactly what was doen in the 80's to cure the same problem we have now.

 

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Renting with option to buy:

a solution for:

young people staying at parents´ an not able to buy...  Government support suggested here.
people who want to buy and have no access to financiation at the present moment....
private owners who needs to sell and find no buyers... 
developers with loads of unsold properties: First Occupation License needed here...
Foreigners wanting to start the spanish adventure and with  no access to  the purchase of  a property...
Foreigners wanting to have a second residence in Spain... it is possible a renting contract with annual renovations for the vacations period.
Foreigners wanting to retire in Spain....

I highly advise to be balanced with setting the rent  ( it maybe that rent will no cover the full mortgage instalment, but still better than an empty house) and to submitt all the contracts to arbitartion rather than Courts and hire a reasonable priced Insurance for unpaid rents.

This will bring a bit of  movement to the real estate market during the following couple of years....

 Let´s start changing our mentality and thinking forward

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Maria

I think this is an excelent idea and probably the obvious working solution. All these empty properties should be lived in, not just because the owner needs some rent, but because partments and houses where ever they are need an occupier to bring life to the building. The alternative of millions of empty houses turning into ghettos thru neglect and abandonment is terrible and good for noone.

The problem still remains however that true rents in Spain match wages which are very low, certainly by north european standards. There is no way around the fact that Spanish property to buy is much much too expensive, more in line with Northern europe. I agree that its better to have some money coming in rather than none, but owners wether they be Brits or Spanish are going to have to get relaistic about priceing. The collapse in property prices cannot be stopped, nor would it be a good thing. For the long term health of Spain prices need to fall by 50%, then young Spanish people can buy a home again and the whole market can find a healthy footing. The cost of living will fall for everyone and Spain can become competative once again.

All that then needs to be done is government action to clean up Spain's terrible image regarding respecting foreigners property rights and to clean up the regulation of developers. If Spain remains a nation that "grabs" people's land and property, allows corruption and illegal planning and anyone to set up to steal people's deposits as a so called developer, then it can have little hope of attraction foreign investment in its property market. There are now too many competing markets for Spain to remain a cowboy third world nation in this respect.

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TJ you've been talking about this for about a year now but the Spanish are starting to wake and realize there is a real crisis here. The housing bubble is burst and prices are starting on their long climb down. Even reality has intruded on the other message board (competitor so can't tell you who but it has the name British in it) I sometimes frequent as people are waking up and realizing things are going wrong. Been reading stories of Brits who've moved here in the last 2-3 years decide that this miss rainy cold Britain (can understand why it really sucks trying to learn yet another language -thankfully I work in English all day) and the house isn't selling at any price  and suddenly they are stuck in Spain with no money and a house that won't sell.

Unfortunately the real problem isn't the credit crunch or housing bust but the fact that Spain has killed the Golden Goose. As you mentioned now that the boom is gone people are taking a hard look at what they're buying and don't like what they see. That doesn't bode well for the coast. On the other hand the economy is more diversified and very very surprisingly the banks are quite strong. The economy will recover in time, house prices never will.

If your like us and in the market for a home than you are in luck. We planning on sitting on the sidelines for another year and then we'll start putting in low ball offers. The biggest problem in Spain is that 99% of mortgages are flex not fixed rate and with interest rates heading up in the near term it's going to cause major problems in the housing sector. Most people I talk to say give it another year and the bottom will fall out of the housing market, sooner if rates jump again.

That's an interesting thought about house prices falling below rent, if I understand your numbers correct house (actually apartment) prices would have to fall to under 200,000€ from over 400,000€ rents are currently 950 a month.

As an aside one of the bigest issues facing the ECB is inflation expectations of German unions, inflation is up so they want pay hikes to compensate, wages go up, prices go up, wages go up again, it's a vicious cycle. Caught in between are ecomonies like Spain that need lower interest rates but can't set their own rates.

TJ what's your take on the price of oil the bubble burst and we'll see cheap petrol again in a few months or simply profit selling before the next nig run up.

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Yeah i would quite like your take on that one as well TJ. I know you havent got a crystal ball but you do have a good handle - personally I think this is a temporary correction and I think it likely the oil price will continue upwards without some intervention from higher powers.

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Rob

I think you are spot on and I wish you luck with your hunt for a home. Typically as a proffesional investor you would not be looking for a gross yield of less than 10%, but finance less than renting is a good measure. It takes all the emotion out of prices - for example an aprtment that has gone from 400k to 200k sounds like a bargain - but its not if it was 200% overpriced to start with. In these crashes people always think stocks or houses look cheap on the way down because they have got used to high prices and their reference point was badly wrong. They buy only to watch their cheap asset half again.

Another clue will be when everyone stops talking about property and when you mention buying at 25% of its high they look at you like you are stupid = "Don't you know property only goes down?"

Oil is no bubble. Worldwide depletion is 4% and currently supply is matced with demand. The combined affects of ASIA and population growth and depletion will make olis hit new highs next year I think possible sooner.

Rent is a very good indicator - its the equivalent of earnings for a stock. If your property is really valuable then it stands to reason that someone will payto rent it. If it rents for little but costs a lot to buy you can be sure as eggs is eggs that its overpriced. Beware if your high rent requires foreigners to support it - ie here there is a vast difference between what is charged for foreigners and locals. In a bad slump like we are faceing, foreigners could simply dry up!

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Came across this from breakingnews.com It ties in with another article that I read in Business week that said the Credit Crunch, or more specifically the effects of it will last a full generation.

China:  China holds the key to the next phase of the financial crisis. Falling oil and food prices will come as a relief to western policymakers, but the reality is that the West has already more or less run out of policy options – at least easy ones. They are now largely in "cross fingers and hope for the best" territory –where the best largely depends on emerging market central banks which do still control their own destiny. In particular, that puts the focus on China, which has important choices ahead.

China needs to decide whether to persist with its policy of monetary tightening now that it is beginning to yield results. Growth has now slowed for four consecutive quarters to 10.1% from a peak of 11.9% and is forecast to fall to around 9% next year – a decline that would feel akin to a recession in a country that needs to create millions of jobs for an expanding urban population. Meanwhile, inflation fell back to 7.1% in May, having peaked at 8.7% in February.

The optimistic scenario is that China sticks with its current monetary policy, using bank required reserve ratios rather than interest rate hikes to take some of the heat out of the domestic economy. A slowing Chinese economy would reduce demand for oil and other commodities, leading to lower global inflation. That would pave the way for lower Western interest rates, easing the pressure on Western financial institutions.

But there are two major risks to this scenario. The first is that China tries to ease some of the domestic pain by allowing the renminbi to appreciate. China’s long-standing policy of holding down its currency - thereby sacrificing consumption to job creation – has led to the build up of China’s vast trade surplus, stoking its inflation problem. Over time, further appreciation of the Yuan seems inevitable. But too fast an adjustment could trigger a global loss of confidence in the dollar and dumping of dollar assets.

The second risk is that China succumbs to domestic political pressure and abandons monetary tightening. Earlier this week, the finance and economic committee of the National People’s Congress called for policymakers to be flexible and guard against a sharp slowdown, fuelling speculation over a change in policy. Such a shift would be a major shock, raising fears that an over-heating China would start pushing oil prices back up again, dashing hopes of a quick recovery from the financial crisis.

For the moment, China looks committed to continuing to fight inflation, while allowing only gradual appreciation in the renminbi. But China has a choice – and will exercise that choice in the interests of domestic politics rather than global investors. The rest of the world will have to live with whatever it decides.

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China has less control than people realise imho. We are seeing a nation of a billion people or more move from subsistance to an industrial economy. Once they have got a taste of that there will be no stopping them. Things have changed, just recently the China top honcho had to go on state tv to apologise to the masses because they could,;t get home for holidays - the reporters said this has never happened before.

You can't have a population with internet and cars and wealth behaving like serfs anymore. China will be forced to grow at a fast rate becasue if it does not the people will revolt. Re oil the US uses 25% of teh world's oil something like 25bbls per head of population. Thats with a population of 350m.

Asia has a population of 2-3billion and they all want a US way of life but they currently use about 1bbl per head. Do the maths its something like 25 times 2bn/350m. Say 140 times as much oil. The world is already struggeling to match demand with supply. Add in 4% depletion and you can see where oil is going.

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US or EU way of life almost the same now...US still richer but we are. over the medium to long term, moving ahead.....perhaps 10 years behind

You never know.....the growing Asia and China middle classes may well join the Russian and Polish etc and want to buy a ' Home in Spain' to really enjoy our EU culture and have the sun, boats, good food and wine....and a more relaxed life style !!

After all the Moors rules southern Spain for 900 years and whiist the very rich have never left, the middle class may well follow.....for the same reasons as the rich...freedom to do what  they want in the sun!!!

Perhaps good for long term property in Spain!!!!...not all doom and gloom!!

      

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Continuing on the house price theme, prices here in Madrid have been holding up much better than I would have expected considering the crisis along the coast. While there has been some softening of the market, prices are down about 15% at the most, b ut still well above rent and affordabilty. Most people I talk to who are selling have no problem getting reasonable offers (as vs a low ball one) but the people are unable to close due to being turned down for a mortgage or the fact that their own unit hasn't sold.

In general I don't quite understand who is paying these prices??? Talking to our hair dresser the other day she was telling us about some apartments that she looked at 600.000 euros. That's not far off the average price for Madrid. Considering the Spanish tend to take 100% mortgages I'd like to know how they can afford those prices.

As you mentioned in your Nett Zero thread prices always revert to the mean, in my head I know that's true but my heart gets discouraged when I look at prices around here. Even on my wife's wage I'm not sure how we'd afford anything decent. Perhaps it's age, we're both close to 50 so unwilling to take on the killer mortgage at our age and the fact we bought a beautiful place near Frankfurt (just before moving here) and we paid under 70.000 euros for Needed renovating but still! Same place here would run over 300.000 euros.

I remember reading before the UK housing bust about how 1st time home buyers were priced out of the market. Sure sign that houses are overpriced and will come down.


This message was last edited by Rob in Madrid on 7/27/2008.

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