With so much talk about bubbles bursting,
plus speculation about crashes and soft landings, what the
implications of having bubble and is it likely to burst or
By "bubble" we mean that something has been
inflated artificially. In this case causing an excess of
supply over demand. If this bubble bursts there will be a
crash. If it deflates slowly we have a soft landing.
The is an interesting article on the
subject at spanishpropertyinsight.com © Mark Stucklin. The writer suggests that if there is a
Spanish real estate bubble then it will eventually burst
under its own weight and that: -
There is no bubble if property prices high because
the are driven by an excess of demand over supply.
The is a real bubble if the price of property does
not reflect the true demand and the demand is driven
by temporary factors that could disappear.
It takes several years to plan and
build properties and this encourages bubbles. More new
properties have been started in the past few years than in any other
Investors have come to view Spanish
property as risk free way to make money. Underestimating
the risk is often how bubbles start.
In a survey started in February 2006, in
which 876 were polled, 72% opined that a bubble existed and
28% thought property is reasonably priced. English results
were 66%/34% and Spanish 91%/9%.
See the full Survey Results here. © Mark Stucklin
The United Nations
dispatched a special envoy on adequate housing to report on
the Spanish situation.
Some of this makes
Either read the report
or just take my word for it. There is a very serious excess
of supply over demand and prices have become unaffordable.
So, Yes - there
definitely is a Bubble!
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|The recent boom, which started in 2000,
was driven primarily by UK buyers of second homes in the sun
attracted by Mediterranean lifestyles and the possibility of
short- or medium-term profits.
Property purchases were funded by loans
raised against the increasing equity of their UK homes (due
to the property boom in UK) and/or low-interest Spanish bank
loans against the foreign property.
Property value increases were so steep that short-term
off-plan investments were viable.
The Spanish domestic market was also caught up in
the boom with what seems like an endless flow of cheap money
and variable-rate new mortgages of 3.25% to 3.5%.
and the benefits generated by housing have led to wide scale
"... scandals, such as the one in Marbella,
constitute only the tip of the iceberg."
" ... welcomes the
nomination of the Special Prosecutors to look into these practices".
The UN Press Release
There were spectacular rises in real
estate values, both new and resale, and many short-term
speculators bought off-plan.
The upward spiral continued and developers
planned and started more and more future projects fuelled by
early sales of existing ones until 2006 when 600,000 new
units were started.
However, prices in established areas (such as Costa de Sol,
Almeria and Costa Blanca) levelled out and started to fall -
probably because of increasing supply in new areas.
Whilst this was happening Spanish real
estate began to suffer strong competition from emerging and
recovering markets such as Turkey, Bulgaria, Croatia and
Coupled with that the British press gave Spanish real
estate a hammering over land grab and corruption scandals.
More recently there have been reports about a Spanish
property crash. Although there is still a lot of interest,
buyers seem hesitant (or perhaps cautious).
If they are waiting for prices to fall - then that is
exactly what must happen!
Also during this period warning bells were
sounding for the UK economy and it was feared that consumer
over-confidence would cause runaway inflation.
The main problem here as well was unacceptable increases in
house prices which the Bank of England tried to control by
increases in the bank rate.
It needs to be understood that Spain and
UK have a completely different set of issues.
The UK has an acute housing shortage and a
small land bank. Until a million new, reasonably-priced
houses can be started, which will probably never happen,
house prices have to be stifled.
Spain, on the other hand, has a huge
potential land bank and the recent boom has already cause a
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On July 19th HBOS PLC (Britain's largest mortgage
lender) upped its forecast for house price inflation from 4%
to 6% due to statistics for the 1st quarter
Although 6% was still the smallest rise since 1995, it was
predicted that the B of E would soon have to increase the
On Aug 3rd the B of E increased the rate by 1/4 point to
4.75% and the Central European Bank increased to 3%. The B
of E further stated that another increase would be
considered for November.
The reason given was to bring inflation back to the 2%
The B of E and the government is
attempting to keep house price increases in the 4% - 5%
range and inflation to 2% in order to avoid the kind of
crash that happened in the 90's.
It is as well to remember that Spanish real estate values
collapsed at the same time.
Spain's major industries are tourism and
construction and the UK is the biggest client. For the most
of the past three decades these have provided the backbone
for healthy development and full employment.
Spanish tourism also has a serious problem.
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Spanish real estate agents
are predicting a "soft landing" and, as far as
concerned, that is probably what will happen.
The reason is that most have
portfolios of both resale and new property.
There is also a lot of talk about "adjustments" and clearly
this is what will have to happen.
By "adjustments" they mean that sellers
have to reduce prices.
The resale market is not such a problem because generally
the sellers will simply have to forgo expected profits or
remove the property from sale.
Developers are the more vulnerable and for
most there are difficult times ahead.
They have borrowed heavily to fund what seemed to be an
endless demand and are now facing interest increases and
have also borrowed heavily to ensure the availability of
Many have paid inflated prices for building land.
Most of them have not generated enough capital to sit it out
neither can they afford to reduce prices sufficiently to
compete with the devaluing resale market.
Spanish real estate long-term has been a solid, enjoyable
investment. Right now "long-term" is the only logical what
to look at it.
Whatever you like to call it "Crash" or
"Soft Landing" - the "Boom" is well and truly over!.
Further links to the Spanish Property
The Economist: 'Going through the roof'
(March 28 2002)
The Economist: 'Whose is the fairest of them
all?' (Oct 16th 2003)
Kyero: 'Independent spanish property price
statistics' (July 2 2007)
Mail on Sunday: 'The property pain in Spain'
(May 8th 2007)
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See my follow on article
Spanish Real Estate - The Future.
© Mike King July 2007