Friday, May 20, 2005

Spanish "Burbuja" Worries Economists, ECB

This story about the Spanish housing market sounds familiar to the US. "'If you go back to the mid-1980's, Spain has had the most rapid price increase in housing of any large country in the world,' said Michael Ball."

"As prices continue on their vertiginous path, however, Spaniards are starting to talk about a 'burbuja,' Spanish for bubble."

"'Housing-price inflation is the first indication of a monetary policy that is too expansionary,' said Jörg Krämer, the chief economist of the HVB Group in Munich. 'If we get a bubble, there is a high risk it will burst.'"

"In February, the European Central Banks' president, Jean-Claude Trichet, warned that 'the combination of ample liquidity and strong credit growth could, in some parts of the euro area, become a source of unsustainable price increases in property markets.'"

"Second homes also fuel the Spanish market. 'If there's going to be a crash, it's likely to be in these coastal areas,' Mr. Ball said."

"With this atmosphere of euphoria tinged by foreboding, Spaniards are like partygoers with one eye on the clock. Storefront real estate brokers have sprouted up all over Madrid, peddling everything from dingy apartments for $189,000 to elegant villas for $3 million and higher."


At 8:18 AM, Blogger JLP said...


Forgive me if you have already covered this, but tell me what do you think is driving the bubble?

Is it the Boomers buying second homes?

Is it low interest rate loans turning renters into purchasers?

Is it immigration?

I'm just curious as to what your thoughts are.



At 8:28 AM, Blogger Ben Jones said...

I think it is a speculative mania set off by too much money chasing the assets. Add in how long it has been allowed to run and you have a situation that threatens the whole financial system.

At 8:30 AM, Anonymous Anonymous said...


Not Ben, but I belive it is the current lending standards (or lack thereof), low interest rates (the constant focus on the monthly payment) coupled with creative financing (I/O's, ARM's) and the fantastic notion that real estate is cool and exciting and the hip thing in which to invest.


At 8:34 AM, Anonymous Pamela said...

Okay, this is what I've been trying to tell my French teacher here in Brussels. We had a big conversation about housing prices here last week, and she insists that because of all the new EU countries, that RE here in Brussels has gone sky high. I mentioned this in a previous post. I just told her to make sure that it was true, and not just what the RE agents were saying. Anyway, she brought a newspaper article to class on Wednesday that said how high prices have gone. Apparently the article said (I'm not that good in French yet, so I counted on her translation) that prices have been climbing since 1998. Sounds like a few places in the US, regarding timing, doesn't it? Then I asked if prices have ever gone down. And she emphatically said "NO!" I don't want to get thrown out of French class my first year, but this is hard for me to believe, so I said nothing. She has a 2 - 3 hour commute into the city (yes, in little tiny Belgium) of Brussels, and is desperate to move closer. I just don't know enough about Belgium, Europe, etc., but this sounds an awful lot like what's going on in the US, England, etc., minus the creative financing.

At 8:50 AM, Anonymous Jim à Venise said...

Il y aura une chute énorme à Bruxelles! Ditez-vous cela à votre professeur de Français.

At 8:52 AM, Blogger JLP said...

I remember reading or hearing sometime back that low interest rates were partly responsible for increase in home prices. With low interest mortgages, more people could afford to purchase a home. With more people buying homes, prices have no where to go but up.

My question to that theory is then why are so many apartment complexes being built? If less people are renting then apartment complexes should be running higher vacancy rates. Right?

This is a pretty cool topic.



At 9:00 AM, Anonymous BoyInTheBubble said...

La burbuja... I like it. It'll make people wish for a bad case of el tourista by comparison.

(I know, I'm mixing Spain and Mexico.)

At 9:02 AM, Anonymous aspaniardinourmidst said...

(Spanish second homes)

I spent some time a couple of years ago in Southern Spain (costa del sol). The southern coast of Spain (as well as the Algarve in Portugal) is chockablock with tacky condos as far as the eye can see. Most of them are inhabited by Brits (and to some degree Germans) who are using the area for 2nd homes and vacations.

My guess is that a lot of the appreciation in S Spain comes from Brits tapping equity in their own inflated real estate back in the UK. As the UK corrects or tumbles, it will have a domino effect on S Spain.

There is going to be a tidal wave of condos for sale on the Costa del Sol in the years ahead. The price gains in that area are clearly unsustainable and are related to asset inflation in the UK more than any fundamentals connected to S Spain. The quality properties will probably fare better but the area is packed with wall-to-wall shoddy junk.

At 9:13 AM, Anonymous guynoir said...

(Then I asked if prices have ever gone down. And she emphatically said "NO!")

Correct me if i'm wrong, but i think prices took a bit of a hit in 1940 when the Nazis invaded Belgium.

History has a way of messing with economic booms. Something always comes along to upset the apple cart.

The key to long-term RE investing---as opposed to short-term speculation---is to identify a trend and get in early. You need to separate fundamentals from speculative bubbles.

For example, Croatia was known as the playland of royalty and the rich. The Dalmatian Coast is spectacular with beautiful beaches and sparkling clear waters. Croatia has more beachfront than any other European country. Then WWII came. Then Croatia became part of the Soviet sphere. Then civil war came. Croatian property was in deep depression for obvious reasons. Yet the beaches and water remained as lovely it ever was.

Now Croatia is emerging from a long dark age. It has applied for membership in the EU. New roads are being built and airlines are flying again. Property is beginning to take off.

Now that's a fundamental story. Obviously there is speculative activity in Croatia now, but it could be a long-term bull run if you are patient.

But so much of what is happening in many parts of the world in terms of RE has no fundamental story, it's just asset inflation fueled by EZ credit, frothy sentiment and speculation. Always pay attention to the fundamentals and wait for your pitch. When the numbers work, go for it.

At 9:44 AM, Anonymous Anonymous said...

Guynoir, i am Croatian working in CA, my plan was to seell my house in CA and but a beach house in Croatia or wait for the bust in CA and buy something here...that was in 2003, since than, dollar dramatically declined so i cannot buy anything outside US borders because dollar is not competitive plus Croatia is experiencing large number of Brits, Germans buying and prices in some areas are higher than Beverly Hills (per square foot).

Also i cannot buy anything in US either because i am not willing to take I/O loan. All i can do is watch my money in the bank losing value (because inflation is much higher than cooked CPI number reported by Gov).

At 10:58 AM, Anonymous guynoir said...

( i am Croatian working in CA, my plan was to seell my house in CA and but a beach house in Croatia or wait for the bust in CA and buy something here.)

You are right, the UK bubble has created a lot of speculation in places like Croatia---kind of a transfer bubble. So now may be an inopportune time to jump in the water, so to speak.

But the point I was trying to make was that there are fundamentals in place in Croatia (and other areas) that should be generational in length. After all, how much less-bullish can conditions get than having a world war, a communist takeover and a civil war in rapid succession?

The danger these days is that capital is more mobile than ever. So a boom in England can launch a boom in Croatia very, very quickly. Prices, then, can ramp out of control and you could seem boom/bust/boom/bust. We saw this in the US in the late 1800s. Lots of Euro money flowed in and the US had multiple crashes and busts from 1872-1900. But the fundamental story remained intact. As an investor, it was important to buy during the busts and sell or hold during the booms.

At 3:37 AM, Anonymous Richard said...

I am an American who has lived in Spain for 14 years and I also am in the property sales business to non-spaniard second home buyers from other European countries. Here is my take on the situation.
The second home market to non-Spanish buyers even though inflated will maintain solely due to the demand from northern Europeans for a Spanish home in the sun. Spain is still the Florida of Europe. Sales have slowed, prices are high but the market for these homes will not go away.
The Spanish national market is another story. Spaniards have always had a strong sense of need for a home, better said a “piso” (condo or apartment). Spaniards are also very susceptible to the herd mentality. What others are doing we also need to do. There has been a fever for the past 5 years or more to invest in “pisos”. These pisos are usually small apartments in large monolithic apartment blocks appearing much like low income housing developments in the U.S. High density, little common or green areas and maximum profits for developers. Single homes are considered mostly for the wealthy. Spain’s property prices have experienced the highest increase of any country in the world!
The first quarter of 2005 prices increased over 17%. It’s really is out of control. The common thinking is “noooo” prices won’t go down, what bubble? The Spanish economy is mostly driven by contruction and all you see are new housing blocks being built. The Spanish family can no longer afford to buy and are sacrificing basic needs to maintain payments of their pisos
To me there is no doubt that there will be a reversal. I do not think it will be a bubble, but more like when nearing the top when riding a roller coaster. It starts to slowly reach the top, crawling it’s way over the peak, then takes a dive. Spain then will have some serious economic, social and political problems to deal with.


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