What really is the current state of the Spanish market?

From Money Morning today:

Spain's house price crash is worse than it looks

Right now there’s clearly some ‘statistical noise’ in the housing market. After a sharp fall, prices stabilise for a while, which can give the impression there’s a pick up underway. But anyone feeling like buying a house right now should take a look at what’s happening in Spain.

Why? On the surface, the Spanish property scene doesn’t look too bad. Ministry of Housing figures show just an 8.5% drop over the last 12 months from the mid-2008 peak. That’s not so bad, given that Spanish house prices more than doubled over the previous 10 years. But the official stats are a long way from telling the whole tale.

The independent house price index compiler Tinsa reckons average prices are 13% off the top, and down 18% on the coast. But the word from developers and estate agents is of falls of up to 30%.

When you look at the earlier building boom, this is no surprise. Between 2001 and 2007 Spain went mad. The country put up 29% of new EU homes despite having just 9% of the population. The end result has been a glut of 1.5m unsold homes.

That sounds like a recipe for disaster – which of course, it is. Now that the housing bubble has burst, home sales have plunged by more than a third in the 12 months to May. Shedloads of developers have gone bust, owing billions to the banks. And said banks are now being forced into taking on rows of empty houses no one else wants.

Spain's new boom industry - bank robbery

Hence the next problem. With the number of properties for rent soaring by 55% over the past two years to 3.3m, the highest since Ministry of Housing data started, rents in cities have begun dropping for the first time in seven years - by up to 8% so far. “Those who need to sell but can’t are being forced to lease” their old house, Fernando Encinar at Idealista.com, Spain’s largest property website, tells Bloomberg. “We haven’t seen this number of properties for rent since the 1950s”.

Rents can only fall further, which will depress prices even more. The jobless rate, at 19%, is the highest in the EU and is set to climb even higher, which will only add more forced sellers.

And here’s the extra scary bit – the recession is resulting in a very definite rise in crime. Bank robberies are up by 20% within the last two years. “People are committing offences through necessity, first-time offenders who can no longer continue to maintain their lifestyles and so turn to crime”, says the head of criminology at Camilo Jose Cela University, Francisco Perez Alba, to the New York Times. As Jose Manuel Murcia of the Workers Commission union federation puts it, “Banks are denying credit. People can’t pay their mortgages. There’s unemployment, hunger - and there’s money in the banks… so it’s logical to rob a bank”.
 

 A fellow money morning reader - you will be reading the Daily Reckoning next lol.

I was wondering too about all the unwanted property the banks must now have on their books. Its not in the banks interest to be property holders or in their business model, especially when its all unwanted by everyone else. It must be the last thing they wanted, especially as there is no bottom in sight.

At some stage they will be forced to unload it all at any price to try and right their books so that they can lend again, banks that need any rescue from the EU will be forced to dump it all I suspect. This is good news in a way as it will send the market into freefall, and then a bottom hopefully can be found. The alternative is what happened to Japan in the 80' s a lost decade of slow stagnation and decline.

Anyone not holding for the long term would be wise to try and beat the banks to it.

The general opinion in Spain seems to be that the Banks will overall do exactly the same as they did in the aftermath of the last property crash in Spain and only sell at the prices they want and hold the rest 

Often taking over the developments themselves and this is with the support of the Bank of Spain

This will stop the market overall crashing in the way you predict

As a result of this the Banks made a large amount of money out of tthe crash during the following boom!

The UK banks did this with commercial property to some extent at the same time  and are doing it in this UK crash, only appointing administrators to the bad cases

Only those who have to sell appear to be accepting 'vulture offers' and for new ready now the level seem to have settled at a discount of 25/30% on original asking prices

Polaris World have come to terms with the market ,as have all other developers, and the current offer at Arenales del Mar Menor is an example with a discount of 30% off the original asking prices and down to a starting price of 120.000 €

 Brian

With respect what you say is not going to happen. Altho comparisons with the early 90s are valid in some respects, in this case they are not. This bust is so much larger, that it starting to make the 1990's look like the bankruptcy of a corner shop.

Its estimated that European banks are up to their necks to the tune of 16 trillion, much much worse that just club med thanks to the crazy boom in eastern europe, who were not even on the scene last time. These people took out mortgages by the thousands in swiss francs to get a low interest rate. Now their currencies have collapsed by 40% and they have no hope of ever repaying the loan.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4590512/European-banks-may-need-16.3-trillion-bail-out-EC-dcoument-warns.html

Just today the FED in the US admitted that the total bailout programs in the US could reach 23 trillion.

These sums are getting on for the total GDP of the world. There just is not enough money to go around.

If you paid back a million dollars every day back to the day that Jesus Christ was born, this would still not account for a trillion dollars.

These figures are trully insane. Banks will not be able to hold onto this property because their capital adequecy ratios are shot to pieces. Governments around teh world need the banks to start lending again. This can't happen when their books are choked with property that nobody wants.

To give people the idea that like in the 90's everthing is going to be ok again is just plain wrong. The fact that the 90's bubble was revived by further monetary expansion and lowering of rates, has got us this bubble and this mess, inches from the end of the financial world as we know it.

It can;t happen again, where do you go from 0% interest rates. I will tell you where you go - its called QE and it means for the UK printing 125 thousand million pounds out of thin air.

If you are wondering if this is a good plan - take a look at Zimbabwe.

Well, we will just have to see what happens

Already in the UK market, the lack of supply is bringing back activity  and in some sectors sales are quick...my daughter who is selling because of a job move sold within a week of it coming on the market-typical family house in Cheshire

RICS reports a hardening of asking prices, mortgage defualts are not as high as expected...due no doubt to low interest rates

But that is UK

In Spain we are already seeing the Banks holding on to  property and not forcing fire sales, all with the apparent  support of the Bank of Spain

I'm not calling the bottom, but I do think your prediction is a touch extreme and I have to say I heard the same talk during all the recessions since the 70's...which was my first

When the lights went out with a 3 day working week ,.biggest stock market crash, 25% inflation etc it looked like the end of post war economic growth......but we recoverd amd moved on.....and it will happen again

TJ222

You may think it is not going to happen but it already is. There are 21 unsold apartments on our urbanisation which have recently been sold to the developers bank, who are marketing them the same way as the developer (and indeed have sold 2 last month). This developer by the way is one of the largest in Spain. The reason behind the deal I do not know as the developer does not seem to be in financial difficulties.

 tinto

I don't think your experience of 21 apartments is much of  a bellweather for the market as a whole. Spain built more property than the rest of europe combined. The glut is enormous, millions of unwanted apartments being added to by the day as unemployment and hardship forces more peopole to throw in the towel. Even in a good economy that would take a decade to undo.

I repeat the banks will not be allowed to hang onto the properties, infact this would be much the worse outcome. This is what happened in Japan in the 80's and they are still in recession 30 years on. How can a bank make fresh loans when it is chocked with bad debts. It can;t. These debts have to be paid off or written off.

The strong part of the EU Germany etc are fed up to the back teeth with bailing out the PIGS. Unemployment of 20% plus in many of these new entrants is threatening to tear the EU apart, as these countries wish to devalue as they have always in the past. Look at Italy, a serial devaluer, I think the temptations will be too strong.

You say that when we come out of recession everything will be ok. But what are we going to come out of recession with. The UK and Spain boomed on the back of property and the city of London. The great credit expansion has been going on since the early 80s which explains why each boom and bust was reinflated. But each time the boom and bust got bigger. Now the bust is so big it threatens the stability of the whole world.

Without this boom in credit and massive government debt, the truth will come out. What is it that the UK and Spain do for a living. We used to have productive industries and once we used to be an empire. Now we run shops and try to sell each other houses.

Once the next general election is upon us and a sterling crisis threatens, someone will have to cut all the government spending to bring it into line with income. Then the UK will be lucky not to have 20% unemployment.

Brian your experience of the last 30 years has been one long credit expansion. Its over and there cannot be another boom of credit. Without the credit boom people will have to buy houses with real money and there is simply not enough real money to go around.

Lets keep this thread going and see what happens. I am just being a realist here and asking people to look at the real current situation for what it is. Unlike you I have no vested interest in wether people buy property or not. I do however care for my fellow man and don;t want ot see anymore suffering with property in Spain. This whole site is a sad sad collection of suffering and woe, all on the back of greed and naivety brought about by people and goverments encouraging speculation in something that should be a home - a roof over people's heads.

The Bank are being supportive and are being allowed to be

Martina Fadesa , the largest developer of them all has stated that buyers who have paid deposits on developments which will not be built and do not have bank guarantees will be repaid their money in full...all agreed by the financing banks

And that they will be re starting the other sites in early 2010

So what does this indicate?

Well. without a BG you are just an ordinary creditor and come after the secured creditors but not now with this company if the development is not going to be built [ in the short term]

Gives confidence to those who are waiting for their property to be finished, which is great

Fadesa is so big that the financing banks must have received the nod from the Bank of Spain and that there will not be massive fire sales in Spain as TJ222 states 

And of course not bad PR for Fadesa when they start marketing again!

" The Bank are being supportive and are being allowed to be"

If this is true, then in the longer run its much the worse outcome. This is just the sort of thing that turns a recession into a depression. Market forces are trying desperatly to cleanse the system by debt default and falling property prices. If this is not allowed to happen, then the cure cannot be enacted, and the situation gets dragged out for decades and in the end is mcuh much worse.

Of course since Spain's economy is itself teetering on bankruptcy, the bank of Spain may not have the final say. If it has to be rescued, then the EU will be calling the shots. Lets hope that does not happen.

Of course this whole discussion brings up the distorted rather sad view many people still have about economics.

Why would anyone apart from a speculator want house prices to go up? If you buy say rice or bread and it goes up in price, you don;t say whoopee, my bread has gone up in value. You say oh s*it rice has gone up in price, isn't food inflation terrible these days. The same goes for anything you buy. Its not that the house as gone up in value, its the same house, its the purchaseing power of your money that has gone down. Thats alway always a bad thing.

So why on earth would you want your home to go up in price. Like the rice its not going up in value, its plain inflation and its bad news for pretty much everyone. If you are going to buy another house ie moving up the ladder as most people do in the way of their lives, the money you have "made" on the existing home is offset by the increase in the larger home, so infact you are worse off as your debt in percentage terms is greater as is the price.

As the price of houses inflates, the cost of putting a roof over your head goes up in terms of your salary. This means you have less disposable cash to spend in teh economy. This is a real drag on economic growth and prosperity. Also as people need more and more wages just to survive, they increasingly get priced out of the global jobs market, so jobs and manufacturing go abroad. Then you get the situation we are in, where there is massive unemployment in teh western world.

All around me in Spain here I see kids of 30 plus living at home with their Mums and dads. House prices have to fall so that once again wages and prices are in line and young people can once gain afford to buy homes to live in.

The more banks and govs try and stop this from happening, the worse things will get with the economy and unemployment.

Lets hope for everyone sake that sanity prevails and we avoid a great depression.

The rest of the productive world, ie Asia etc will come out of this just fine. Western Europe is in danger of serious long term decline.

I always thought that in the last depression we had deflation - far worse than inflation.  When you get deflation no one wants to buy anything except the bare essentials because you know the prices will be cheaper next week.  It seams to me that you think defdlation in house prices will be good!  Most people buy there house to live in because they know in the long run property prices always go up.  There may be a period of a few years when they stagnate and as now actually go down but historicaaly house prices always recover.  This means that normal people will try and buy their house.  Something to live in, look after and call their own - something they can leave to their children - what people call their home.  You seem to think deflation would be great for most people.  But just stop and think - if people believe that house prices are not going to go up but will continue to fall then most people will not buy but will rent their homes to live in.  The culture of cherishing and looking after your home to pass to your children will be gone forever - intead people will be renting short term properties which will be somewhere to live and not somewhere to call a home - what a shame.  Why do you think this would be good?  I feel you hope that property investors just get a bloody nose - well most serious investors (people who buy large amounts of property) will just move into the next lucrative market and make their money their.  It will be the normal honest middle class family who will be hurt.

Do I think you are right no - historically house prices have always increased over a period of time because at the end of the day the house is something that every family needs - it is an essential - also there is a limit to the number of houses that can be built.  Normal people also feel it is a safe investment - because unlike stocks and shares it is something you can see and touch and relate to.

 Nigela

Thanks for your post - I'm glad you brought up the topic of deflation, because its another one of those myths that needs correcting.

"When you get deflation no one wants to buy anything except the bare essentials because you know the prices will be cheaper next week."

No no and no. This is an illusion put about in the media by the banks and government to confuse people. Banks are the ultimate beneficiary of inflation as they get to use the new money first, before it loses its purchaseing power. Governments need inflation to cover the fact that they can't keep spending in control without the unpopular resorting to increased taxes.

We currently and have been for the last 50 years or more been benefiting from deflation. Its the natural product of technology and increases in manufacturing skills.

Most consumer items that you buy are in deflation and its a great thing. IT products not only fall in price by the month, but they get better as well. The phone, the laptop, the tv you bought last year, are now not only cheaper but much more powerful.

Far from not buying these things, we buy lots more of them because they represent such good value. 20 years ago, a mobile phone or a large tv where the luxury of rich people. Now the unemployed on benefits have the biggest widescreen tvs. Last time I went to India, the rickshaw drivers all had them. This is progress and prosperity in the real.

The end result is everyone wins. Everyone gets a cheaper product, more manufacturing is done and more employment is created. Its a win win. More spare cash to consume other things and to save real money.

The same would be true of houses, more would be built, more would be sold, and people would be able to afford them in teh long run and have spare cash, without this ghastly boom and bust. There would be steady sustained employment and prosperity.

"The culture of cherishing and looking after your home to pass to your children will be gone forever - intead people will be renting short term properties which will be somewhere to live and not somewhere to call a home - what a shame."

Again you are confuseing my point. I think its great that people should be able to buy and afford their own homes. Thats exactly my point. All over western Europe young people cannot afford their own homes. Why - because the artifical and damaging boom, caused house prices to get out of line with real wages. People who owned existing property were benefiting from the unfortunate postions of those younger people not on the ladder. Existing owners though they were getting rich, when in fact no real wealth was being created, all that was happening was that the burden of debt was being passed on to future generations.

Except that the burden of debt could not be paid, everywhere the first time buyer was being priced out of the market. So it was a classic pyramid scheme and it was only a matter of time before the whole thing fell down.

Let me be clear. All I want and all everyone should want is for prices to get back in line with wages. wages pay mortgages, its a simple as that. Prices can get out of line for a while, but in the end they must return to wages. I have no issue with property prices going up in line with wages, thats how it should be. Thats healthy and sustainable.

Until this is allowed to happen, the economy will not recover on a solid footing. If the government and banks try to raise property prices in order to bail themselves out, the situation will only get worse down the road, the result will be higher and higher unemployment. I think 20% unemployment is high enough don't you?

Sorry cant agree with you.  You are not talking about deflation in the true sense of the word you are talking about inovation.  Technology improves and people must have the latest gadget which then becomes cheaper because it is outdated.  This is not what is meant by deflation.  Real deflation is where everthing goes down in price - and by substantial amounts.  When the RPI (or whatever index you want to use to show price changes) shows constant decrease in value every month and more importantly is perceived to show continued constant decreases.  When this happens people stop buying - put of purchasing foir a few months - maybe a year or 2.  Good idea but what does it do the economy - well no demand therefore more unemployment therefore higher taxes to pay more benefits therefore people have less money therfore buy less therefore less demand therefore more unemployment...... the circle goes on.   This is what happened in the 30s - I was to young to be alive then but my father lived through the really grim years of the 30s when people starved - people rioted for jobs not to buy TV and phones but to put bread on the table for their children - that was a real recession in fact probably the only depression the world has known.  Since then every recession has been less painful than the past one. Why? well it is because we are all so well of that we don't know what its like to be poor - because we have had so many years of growth followed by the old year or two of a recession.  When we have 2 quarters of negative growth they call it a recession!   People who are unemployed today don't starve (not in the UK anyway) they still buy new clothes have mobile phones whatch TV. 

I am not trying to say people today are not having problems but when you start talking of recession and depression just put in into perspective.  It is like today there are still charities in the UK complaining about the level of poor people in the UK.  How to they define poor - well its not people who are starving - they base it on a percentage of average income.  ie the more rich people you have the more poor people you have.  Pathetic - if you want to see poor people go to a country like Guatemala - go around and look at the families who live in a shack have no electric - walk miles to a market - do their washing in concrete communal areas with just water and soap.  A country where the children are dumped on the streets because their parents cant afford to look after them and the police treat those street kids as vermin.  Thatys poor.

 Nigela

I'm quite happy to disagree with you, thats what interesting discussions are about.

"Technology improves and people must have the latest gadget which then becomes cheaper because it is outdated."

It doesn't become cheaper because its outdated. When I bought my Canon Ixus for example, it was 4mega pixels for 200quid. A year later its 8Megapixels for 150quid. Its quite the reverse, I get a cheaper camera AND a better one.

The reason it gest cheaper and better is because of technology and manufacturing improvements which lead to deflation in prices. The very prices that are measured in the goods basket that makes up CPI and go to offset the terrible inflation in energy and houseing. That goodness for technology.

Likewise house prices should ideally be constant or falling, because improvements in building materials and techniques should be helping offset limited land. But they don't because the governemnt is inflating the money supply faster than you can make these improvements.

Just as in the case of the rice going up in price, a house does not go up in value. Its the money that is being used to buy it that is loesing purchaseing power. It takes more pounds to buy the same house, how can that be good news.

you say that everyone should have a home. I fully agree, so why should they keep gping up in price so as to make them unaffordable for these very people?

How difficult is it to see that home prices going up means people have less money to spend in the economy, so unemployemnt goes up.

"This is what happened in the 30s - I was to young to be alive then but my father lived through the really grim years of the 30s when people starved - people rioted for jobs not to buy TV and phones but to put bread on the table for their children - that was a real recession in fact probably the only depression the world has known."

Exactly nigela. What caused the depression and all this misery in the 30's?

The preceeding roaring 20's. What caused the roaring 20's - the great expansion and inflation of this time, brought about by assets booms of the stockmarket and property - caused by a great debt and credit expansion.

....And to make matters worse, how did the 1930's recession turn into the great depression. There are lots of books on this, but history shows that it was caused by governments getting in the way of the cleansing of assets prices and debt - ie exactly what they are doing today.

"People who are unemployed today don't starve (not in the UK anyway) they still buy new clothes have mobile phones whatch TV."

And the UK government has to borrow and print billions of pounds out of thin air, because the real economy can't support these people. Don't assume that just because Brown can currently borrow and print billions he will be able to do it forever. That way Zimbabwe and central America go. The IMF has warned the UK on its debt, and the credit rating agency Moodys has put the UK on credit watch, threatening to downgrade its credit status. If taht happens we will have a currency crisis and the IMF will be in charge of government spending. Then those on benfits may get a rude awakening.

Firstly when you buy the latest gadget you are paying for the most up todate gadget - that is the premium - 2 years later when that gadget is 1/2 price it is no longer the latest gadget so you are not in fact buying the same thing.  When you are buying up to date gadets you are not just paying for that product you are paying for the fact that it is the most up to date.  Therefore for your comparison to work you have to look not at the same item but the same up to date item.

It is not the same with houses - an old house will often be more expensive than a new one because improvements in houses are very slow if at all.  It was said in the 1980 s if car technology improved at the same rate as computers were then people would drive from London to Bristol and then change there cars.  This shows how you can not compare the fast moving technologies to normal goods.

My coment is why would anyone buy a house if they know that next year it will be £10,000 cheaper.  You would just wait.  This is where your argument falls down - everyone will wait to the price drops then the price will keep dropping and dropping.  How can this be good just say you bought a £200,000 house with a 75% (that would have been a very safe debt to capital ratio) mortgage 3 years ago as your family home.   You are suggesting that it is a good thing for that poor family to be saddled with a mortgage of £150,000 on a property dropping  to say £100,000.  How can that be good?  Do you not care about the millions of people who have bought in good faith over the past years - not for investment purposes but for a family home?

The fact that Brown is borrowing so much at the moment to pump money into the economy is not really a bad idea what he has done wrong - and where it shows he has been incompetant - is that in the boom years he should not have spent all the money but have saved a large slice of it to pump money into the economy when the bad years come.  The boom and bust economy will always be around in a capitalist economy -  it is the underlying nature of market forces which are driven by confidence levels - when confidence goes we have a bust.  Then after a few years we will have a boom again.  Browns comment that he has cured the boom bust syndrome just shows our naive he was.

what a great discussion. TJ222 for prime minister!!

oops, looks like my post was the kiss of death for this great thread.