Spanish property prices haven’t fallen enough says LSE professor

Prof. Luis Garicano showing Her Maj a thing or two about the credit crunch

Prof. Luis Garicano showing Her Maj a thing or two about the credit crunch

House prices in Spain haven’t yet fallen far enough, says Spaniard Luis Garicano, Professor of Economics and Strategy at the London School of Economics (LSE), in an interview with the daily paper Público. As a result, it’s too early to say the property bubble is over.

Here are a selection of quotes from the interview, where it referred to the property market situation in Spain.

Q: Have Spanish house prices fallen enough?
A: No. The fall has been very small compared with other places that had similar run up in prices, like the US where prices have fallen by more than 50%. There is a massive over-supply, perhaps of 1.5 million homes, more than in any other country on earth.

Q: Is it possible to change the (Spanish) mentality towards buying homes (over renting)
A: Of course. Renting was common in Spain until the 70s. It disappeared when rents were frozen at a time of inflation. If rents are made more efficient, if VPO (social housing for sale) is eliminated and replaced with ordinary housing subsidies, and if mortgage tax relief is eliminated, the market will change radically.

Q: What must happen to put an end to the Spanish economy’s dependence on real estate
A: Two things. Firstly, the labour market model must be changed, as it is too dependent on rotation and temporary contracts. Secondly, our education system needs to change. 41% of young Spaniards between the ages of 25 and 34 never finished secondary education. That’s the highest level in Europe.

Garicano also answered a question on the banking crisis and bailout, which I thought was rather a neat summary of the situation.

Q: Has moral hazard in the financial system increased?
A: Four years ago, there was still a little bit of discipline in the system, because if you went too far you might go bankrupt. Now the situation is even worse. All the banks know that they are taking risks, and if assets go up, they keep them, and if they go down, the state gets them. It’s Capitalism for the poor and Socialism for the rich.

Q: So the banks know that they will always be bailed out?
A: Exactly. Banks are negotiating with state guarantees. It’s like going to the casino knowing you can afford to lose as much as you want.



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About Mark Stücklin

Mark Stücklin is a Barcelona-based property market analyst and consultant, and author of the 'Spanish Property Doctor' column in the Sunday Times (2005 - 2008). He can be reached by email on