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Spain's property market is shaky; and if its construction sector collapses, the entire economy will go with it, report Heather Stewart and Jon Short
Sunday April 29, 2007
Spain, with its alluring combination of sun, sea, sangria and cut-price villas, is the quintessential place abroad for Brits with a wanderlust. In recent years the market has been as hot as the Costa del Sol in August, but after shares in property firms plunged last week, fears are growing that the extraordinary Spanish housing boom is about to turn to bust.
Hair-raising tales of illegal developments being bulldozed and corrupt planners taking bribes to concrete over parkland have lent a distinctive flavour to Spain's boom. Otherwise, the story is familiar. Just as in the US, a long period of ultra-low interest rates helped to fuel an unprecedented boom. Now, just as in the US, higher borrowing costs are taking their toll.
As it geared up to become a founder member of the eurozone in 1999, Spanish mortgage rates fell sharply. Consumers, understandably, responded by loading themselves up with debt and jumping on the housing ladder, helping Spain to become one of the fastest-growing economies in the zone.
'The dramatic change in financial conditions liberated a strong demand from Spanish households who had previously been de facto excluded from the property market,' explains Gilles Moec, European economist at Bank of America. 'This fuelled a strong increase in prices.'
In Madrid, a two-bedroom apartment in a smart part of town can now cost €600,000 (£410,000). 'This is out of reach for the majority of working professionals,' says Humberto Quesada, a media worker who moved from the UK to Spain five years ago. He says young people are now living at home for longer, as house prices soar out of reach. Foreign investors are heading for cheaper markets in new European member states such as Bulgaria and Slovenia.
And as the Frankfurt-based European Central Bank tightens interest rates to bring inflation under control across the booming eurozone, Spanish homeowners are feeling the pinch. Annual property price inflation has already declined, from double digits to about 7 per cent. Investors are looking nervously across at the US, where prices are now falling and the knock-on effects are beginning to be felt in other parts of the economy.
Bob Lutz, vice-chairman of American car giant GM, warned last week that what he called the 'mortgage meltdown' was affecting sales. 'A lot of people are finding themselves in a position of reduced affordability and that has had an impact,' he told an industry conference in Kentucky.
This pattern of soaring borrowing, struggling first-time buyers and rising interest rates will sound depressingly familiar to observers of Britain's frenzied property market. But although the UK, which has seen faster price inflation than Spain or the US, may be just as vulnerable to a downturn, the impact on the wider economy may be smaller.
Just as in the US, Spain's rising prices have been accompanied by a massive construction boom, sucking in migrant labour and inward investment. That means the slowdown will have a direct, and potentially dramatic, impact on the Spanish labour market. Almost one in eight of the workforce are employed in construction, and it contributes 18 per cent of GDP. Much of the strong performance of the economy over the past decade has been created through building. Last year, the industry turned out 800,000 houses: more than France, Germany and Italy combined.
'The construction business, led by housing, was the whole story,' says Charles Dumas of Lombard Street Research, which warned last week that the sector was about to 'implode'. In the UK, where construction is constrained by lack of space and tight planning laws, the wider effects of any slowdown are more likely to be felt indirectly, through hard-pressed homeowners tightening their belts, than it is in job losses. 'In the UK, when there's a housing market correction, the usual transmission mechanism is the "wealth effect", whereas in Spain, it should be felt quite quickly in the labour market,' says Moec.
Overseas enthusiasm for Spanish housing has already waned. Mike Smith, who runs a website for expat buyers called The Spanish Property Register, says he has seen a downturn in interested users over the last six months. 'In January we were getting 2,000 hits per week.... In recent months it has fallen as low as 900,' he says.
Last week's sell-off in property stocks, which dragged the entire Spanish stock market down by almost 2 per cent, was sparked by the troubles of a single firm. Valencia-based Astroc saw 65 per cent of its value wiped out amid fears that tighter planning regulations would hit its profits. But fears of a broader housing slowdown soon spread to the rest of the sector, where share prices fell by 7.5 per cent.
Some properties are now sitting on the market for as long as two years, and stories of illegal activity in the sector haven't helped. 'People are also nervous and frightened that properties they see may not be legal, or that the operator may go bust,' says Smith.
Finance minister Pedro Solbes called for calm last week. 'Are we in a worrying situation? My theory is no,' he said, indicating that household incomes were holding up and job prospects were good. But if anything, the outlook in Spain is more worrying than in America. The US's Federal Reserve can step in and cut interest rates if things get worse; but the ECB, with the booming German economy as well as Spain to think about, is unlikely to be as kind.
'Countries in the eurozone don't have monetary policy or exchange rate policy; they're a bit stuck,' says Dumas. 'They're not competitive with the Germans or the Dutch, so if you take away the housing boom, they don't have much.' Graham Turner of analysts GFC Economics agrees. 'The US and Spain are at remarkably similar stages of the cycle, but with one exception - the ECB is still pushing rates higher,' he says. 'This could prove to be the sternest test yet of the one-size-fits-all monetary policy. Without the ability to cut rates or devalue its currency, the Spanish government will have little choice but to watch prices fall.'
About 750,000 Brits own houses in Spain. For the many who are happy to sip Rioja and enjoy the Mediterranean lifestyle, the bursting of the bubble will make little difference - but for those who have bought in recent years, hoping to make a quick buck, the consequences may be more painful. For overstretched Spanish households, they could be even worse.