Friday, December 24, 2010

The persistent real state bubble in Spain

Catalan economist Vicenç Navarro has today another good analysis of the ills of the Spanish economy at his blog (all are articles published elsewhere in the media, in this case Sistema Digital, most are in Spanish language and this one too).

Professor Navarro deals today with something I have been saying from several years ago, either by voice, at my blogs or in commentary in other spaces: that the real state bubble is brutal in Spain and that, while it has stopped growing since some years ago, it has yet to burst. Also that this is the main problem of the Spanish economy, not because of debt and other usual idiocies you may read in the media but because the absurd extremely high value of homes causes a practical impossibility to reduce salaries and increase consumption in other areas. People are practically spending every single cent on their homes, be them purchases or rented. 

This does not happen in Germany, where the state provides cheap public housing, and that is a major reason explaining why German workers are more competitive, everything else equal.It also damages population growth as almost every family needs two salaries all the time.

This situation causes high unemployment (above 20%) and low competitivity.

Select quotes (translated by me):

A characteristic of the alleged Spanish "miracle of economic growth and employment creation" was the huge banking investment in the real state sector, creating the bank-real state-construction industry complex, that was the engine of such alleged miracle. As consequence of this, construction industry went to represent 12% of GDP, more than twice what happened in Britain or France.


The ratio between house price and median salary in Spain was almost triple the average of the EU-15 [EU before Eastern extension in the late 1990s]. Hence the huge indebtedness of the population, cause of the great expansion of the real state-banking business, core of the expansive drive of the Spanish economy. 


When the bubble burst, largely because of the negative of German and French banks to keep lending to Spanish banks, Spanish banks turned up owning a huge amount of empty homes without possible buyer. 


If markets worked correctly, the banks could have sold the empty homes and reignited the real state market by lowering prices to more realistic levels (corresponding to local salary levels). Banks however did not do that and are still not doing it, because they fear to lose a lot of money. Actually the price of housing has only fallen a mere 12.8% since its peak (in 2006). As the New York Times reported recently (18-Dec-2010), most real state experts in Europe estimate that the price of homes in Spain would have to fall some 30% or 40% for the housing market to recover and hence reignite the economy. 
[Maju's note: vox populi is surely of even greater discounts, maybe c. 50% or more, official economists are always conservative and pro-banks].

The [central] Bank of Spain protects [private] banks by claiming that the prices have already dropped to the levels deserved. The Bank of Spain, who rejected that there was any real state bubble, rejects now that the homes' prices are still inflated. And it does so to protect the banks. And protecting the banks, it delays economic recovery. Actually the Spanish state should intervene and force the sale of empty homes. But again the Spanish state, which did not predict either the real state bubble, continues claiming that price adjustment has already happened (...)

The problem of the banks, the Bank of Spain and the Spanish state is that nobody believes them. And with good reason. It is obvious that the banks are not absorbing the costs of their extreme speculative behavior. Who is paying for it is the citizen, who has an artificially high mortgage that cannot be paid, and the customers (businessmen and common people) who cannot get credit because the banks are in danger of bankruptcy.

No comments:

Post a Comment

Please, be reasonably respectful when making comments. I do not tolerate in particular sexism, racism nor homophobia. The author reserves the right to delete any abusive comment.

Comment moderation before publishing is... ON