Spain's housing bubble: private credit becomes public debt

Spain's housing bubble: private credit from 2008 is now public debt

According to one participant’s account, an employee earning 1,800 euros net handed over their entire salary each month for a 40-year mortgage. Their parents brought them food and paid their bills. This peine before the Spanish real estate bubble burst. The scene recurs whenever housing prices are compared to wages, and the question it provokes is almost always the same: does the current environment resemble that of 2008? The dominant answer among those who lived through that cycle is no. And not because of optimism, precisely.

What peine during the 2008 real estate bubble burst

Going out between 2002 and 2008 was, according to those who remember it, a boiling cauldron of people and activity. Full nightclubs. School leavers earning 2,500 euros a month on construction sites; crane operators and bricklayers making 5,000. Banks financed up to 120% and even 140% of a property’s value, and there was a product called bridge mortgage that allowed moving before selling the previous home without paying interest for a period. Those in a tight spot refinanced. “People put the BMW, the motorbike, and the alucinación to Cancun into the mortgage,” one account summarizes.

The breakdown of three specific transactions from that cycle shows the scale of the phenomenon: an apartment bought for 54,000 euros in 2001 and sold for 120,000 in 2004; another acquired for 144,000 in 2003 and transferred for 240,000 in 2006; and a townhouse bought for 240,000 in 2004 and liquidated for 395,000 euros in 2007, just before the burst. All with mortgages. That same cycle left another person paying their entire paycheck to the bank for four decades.

Private money versus public debt: the fundamental difference

In 2008, a bubble built on private credit collapsed: banks lending, developers building, individuals signing. The cycle was vicious but identifiable, and it burst all at once. One thesis in the discussion argues that the current bubble is financed with public money: state debt directed toward infrastructure investment, public employment, and benefits. When a significant part of the population depends on that payroll or aid, the adjustment does not come through mass layoffs, but through inflation.

From this, according to that same reading, comes a consequence that did not exist before: purchasing power falls without unemployment soaring. And a second difference in the bailout, according to another intervention: fifteen years ago, banks and large real estate firms were allowed to fail; now money is injected, and the result is more inflation. Employment is preserved, yes, but purchasing power is lost. Some summarize the outcome in an uncomfortable phrase: nothing can burst because everything is already burst.

What percentage of household income goes to housing?

The calculation proposed by one participant is this: in 2008, up to 70% of the household’s income went toward buying housing. Until a few years ago, it was only 30%. Today, it is around 50%. The problem is not the percentage, but that with the remaining 50%, you buy less: you spend three times as much on oil and twice as much on gasoline. Less theoretical effort than in 2008, but worse real disposable income.

The same calculation helps identify where the ceiling is. Much of the market no longer has the cash to pay these prices, and without solvent buyers, supply remains on display: the same unsold homes have been visible for more than a year. Apartments in degraded neighborhoods that sold for 200,000 euros in 2008 now do not sell for even 70,000, while good ones hold their value. The market has split in two.

Who buys housing now: not the 2008 mortgage borrower

The buyer profile has changed. Then it was individuals with paychecks and loans; now foreign investment, tourist rentals, funds, and speculative buying weigh heavily, with part of the analysis placing them at up to 80% of transactions. Added to this is scarcity: fifteen years with almost no new construction, the exact opposite of a cycle where building peine in any town, even remote ones.

Regarding rentals, two factors intersect, described with a bitter tone. One is demographic pressure: the continuous influx of foreign population tightens available stock in high-demand areas. The other is squatting and the difficulty of reclaiming unpaid rentals, which according to some owners discourages putting properties on the market. These are perceptions, not statistics, but they influence buying and rental decisions.

Wages, interest rates, and taxes: the numbers that don’t add up

In the early 2000s, with rates of 4% and mortgages near 5%, the market thrived. The same levels, established, now cause a notable real estate standstill. Wages do not help either: some recall entry-level IT jobs in Madrid paying 18,000 euros a year, and trade salaries in the previous cycle ranging between 2,000 and 3,000 euros with production overtime.

The sequence reads as trinc: 2008 closed with salary deflation around 40%; the current cycle works in reverse, with inflation cutting purchasing power in half. In the previous crisis, unemployment added 100,000 or 200,000 people per month while official discourse spoke of a slight slowdown in the construction sector. The response then, critics recall, was raising taxes and cutting freedoms, with public works plans totaling 60 billion euros.

And there is the startling figure: an apartment bought in Toledo for 14,500 euros in 2017. Those who lived through the previous cycle and remain here cannot explain it, but they notice it when going out. There used to be people and activity around the clock; now, less than a quarter, almost only on weekends. The atmosphere may not be the same as in 2008. The debate remains open on whether this signals a storm or is just another wind.