Edward Hugh on the Spanish Property Market

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This topic contains 8 replies, has 6 voices, and was last updated by Profile photo of logan logan 6 years, 3 months ago.

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  • #55817
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    Anonymous
    Participant

    For those who don’t know him, Edward Hugh is a highly respected Barcelonna based economist. His insights into the Spanish economy make interesting reading for anyone considering purchasing a property in Spain.

    Here he muses on why property prices haven’t fallen as much as they should have. Mark gets a mention in the comments and I have just weighed in at the bottom.

    http://www.facebook.com/#!/edward.hugh?v=wall&story_fbid=143217829052545

  • #100394
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    Anonymous
    Participant

    I cant find his “muse” Perhaps its the wrong link. It will be intresting to read what he has to say.

  • #100395
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    Anonymous
    Participant

    I’ve just realised that you need to be registered as a friend of Edwards to see it. I’ll ask him if he is ok for me to copy it over to here.

  • #100396
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    Anonymous
    Participant

    Ok here was his original post:

    Edward Hugh
    What is curious from where I am sitting is how the Bank of Spain can remain so optimistic on future Spanish home sales, when the US market just keeps sinking. Spain’s housing market was more distorted than the US one, and the US correction started at least a year earlier than the Spanish one.

    http://news.yahoo.com/s/nm/20100824/bs_nm/us_markets_stocks;_ylt=Avrr8MGyV_biZXDSHfDBpJyyBhIF;_ylu=X3oDMTJpZmg2bWk4BGFzc2V0A25tLzIwMTAwODI0L3VzX21hcmtldHNfc3RvY2tzBGNwb3MDMQRwb3MDMgRzZWMDeW5fdG9wX3N0b3J5BHNsawNpbmRleGVzc2x1bXA-

    news.yahoo.com – Indexes slump as July home sales hit 15-year low – Yahoo! News

    Stocks fell more than 1 percent on Tuesday as sales of existing homes in the United States last month fell to a 15-year low, underlining growing concerns about the pace of economic recovery.

    And the comments thus far:

    #
    Fiona Maharg
    Bravo Where is the Bank of Spain optimistic on house sales?
    18 hours ago
    #
    Edward Hugh
    In the financial stability report. They see bad loans peaking some time this year. But it isn’t just them, people keep scouring the monthly sales data looking for a bottom, and what I am saying is that this is hopelessly unrealistic if you look at the US experience.
    18 hours ago
    #
    Vahur Koorits Wishful thinking probably? Sinking house prizes will make problems in banking sector even worse. But the real trouble is that Bank of Spain is evidently an accomplice it this charade that banks in Spain are organizing.
    18 hours ago
    #
    Ferran Moya Arrayás
    In Spain there’s no such thing as a “housing market”.

    Most houses “for sale” are in the bank’s balance sheet and they will be kept there for a long time.

    “Cajas” and banks are not interested in flooding the housing market with their stocks (w…hich would mean a huge devaluation and a lot of provisioning) and BdE is allowing them to do so.

    They are freezing the houses market/price by controlling the housing supply and the housing demand (by only approving mortgages over their stock).

    The extremely high prices, the tight mortgage policy and the economic conditions has excluded most of the demand.
    There’s no other significant supply as residential construction is non-existing.

    They’re just watching the time passing by, hoping that the huge inflation in the next years will hide their (also huge) loses.

    In the mean time, they try to sell some of their overpriced stock to middle class people, which are not yet facing the problem of unemployment and, somehow, still living in the bubble.

    #
    Detlef Guertler
    Ferran: If you could freeze the prices (what they try) and then wait and watch, you`ll have to wait approximately ten years for the market to return. After ten years without new construction enough of the empty houses will have fallen apart… to get closer to an equilibrium of supply an demand.
    Edward: Could it be that the Bank of Spain tries to proclaim a bottom of real estate prices just to bring the foreigners back in the market? Spaniards won`t buy (and of course they dont believe in banks), so to get rid of the stock you either have to tear it down or find silly tourists who fall in love with sol y playa.
    17 hours ago ·
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    Jordi Molins
    The key point from today’s existing home sales for Spain is not the sheer fall, but the dependence of sales with tax incentives. Recall the tax incentive in America was $8,000. Instead, in Spain at the end of this year will disappear that i…n 30 years (typical mortgage length) accrues to about €39,000 (without taking into account the time value of money). The Spanish real estate market will collapse on January 2011.
    17 hours ago
    #
    Edward Hugh
    I think this is a very important point Jordi. So when you couple the disappearance of tax incentives to buy with the shifting demographic outlook, you obviously get a secular downward trend in house prices, regardless of the current deep construction recession.

    Since, foolishly, most Spanish people have a very large part of their net worth sunk in property, this single detail on its own is bound to exert a very strong deflationary drag on the Spanish economy in the years (and probably even) decades to come. Really, denial doesn’t help with problems like this.
    17 hours ago ·
    #
    Jordi Molins
    I agree with you Edward. Just to add that the tax effect will have short-term implications in pricing. Demographic effects, probably the most relevant of all affecting Spanish real estate (much more than taxes, for example) are much more long term and will not have a meaningful effect in January 2011. But the phasing out of subsidies for home purchases will.

    Just to point out that around 20% of Spanish GDP is related to real estate, but more than 60% of Spanish credit is related to real estate. If households do not buy real estate, a 20% of Spanish GDP and most importantly, a 60% of all Spanish credit, will suffer. This will have a material effect on the Spanish economy that up to now, it seems nobody cares about.
    17 hours ago
    #
    Edward Hugh
    Fiona, maybe I should qualify what I am saying a bit better about the BdE, more than optimism, what I find is a lack of realism, which contrasts strongly with the proactive approach we see from the Federal Reserve. Going through their last bimonthly report, I found the following:

    “La inversión residencial continuó inmersa en su trayectoria de ajuste, si bien su ritmo de descenso se atenuó ligeramente, estimándose un retroceso del 18% en términos de su tasa interanual. Al igual que había ocurrido en los meses iniciales del ejercicio, esta evolución fue compatible con una cierta estabilización de algunos indicadores de demanda de vivienda, como el número de transacciones o el de hipotecas, lo que podría vincularse a la mejora de los indicadores de accesibilidad, y también al adelanto en las decisiones de adquisición de inmuebles por los cambios previstos en la imposición indirecta o a la eliminación de las deducciones fiscales por compra de vivienda habitual a partir de enero de 2011. Posiblemente estos últimos factores han influido en la reciente ralentización del descenso de los precios de la vivienda, cuya tasa interanual se situó en el segundo trimestre de este año en el −3,7%.”

    Which to some extent is making Jordi’s point, but they just don’t seem to be up to analysing the implications of anything, they simply stay on a descriptive level, and then you look at the growth forecasts, and the outlook for personal consumption being offered, and it just doesn’t make sense.

    With the kind of deflationary backdrop Spain is facing in the construction industry and the housing market – as Jordi is pointing out – there is going to be a substantial drag on economic activity after the turn of the year, but no one seems to be facing up to the implications of this. That is what I find so frustrating.See More
    17 hours ago ·
    #
    Adie Pratt
    what is happening Jan 2011?
    15 hours ago
    #
    John Smith
    Adie,the whole world will come tumbling down….or not-you need to click on “more” to get the whole story 🙂 ie look at Jordi´s comments.
    15 hours ago
    #
    Edward Hugh
    Basically Adie, there has been a whole argument that the Spanish administration effectively allowed all this to happen by having a fiscal regime which encouraged people to buy, and allowing banks to sell varaible mortgages in such large qua…ntities (in fact the UK does – of did – something similar, but then the Treasury objected to euro membership on precisely these grounds, that the country would be very vulnerable to movements in interest rates it did not control).

    Now the fiscal regime is being changed, which as Jordi points out will make houseowning a lot less attractive. The negative feedback effect of that on the whole market is likely to be large and ongoing, as home ownership effectively downsizes.

    Then at some point the ECB may well raise rates, in which case….

    I mean, at lot of this was very avoidable, if only the people running things had had a bit of common sense, and vested interests had not been allowed to get their way.See More
    14 hours ago
    #
    Adie Pratt
    Why cant I see the bit where Jordi points out what’s changing, I can see that some tax incentives are being changed, but what exactly are they? :-s

    Let me go and read again 🙂
    14 hours ago
    #
    John Smith
    Edward,”administration” referring to both parties?I assume so as they both encouraged the boom.
    14 hours ago ·
    #
    Edward Hugh
    Obviously John, there is no political issue here. And by “administration” I am also referring to the Bank of Spain. Jaime Caruana (the then governor) could have reacted by tightening lending rules, LtV criteria, etc, but he effectively did nothing.
    14 hours ago
    #
    Adie Pratt
    I see 38k and 30 years, but don’t understand why or what or how 🙂

    I was explaining to a guy in work the other day about house price inflation and the mortgage liquidity that fuels it, its a very understandable phenomena, takes literally no …rocket science to understand. Hence its all the more wretched that the worlds economy has been ripped to hell by such an obviously predictable set of events.

    The Spanish banks are starting to release more properties onto the market. I spend a couple of hours a week in idealista and fotocasa and new stuff is turning up, well, new as in a couple of years and not been on those sites before.

    I was digging around on a forum a couple of days ago and someone in the UK posted a link to property on fotocasa, nothing unusual there, but the post was 4 years old and the same damn property was for sale 4 years on and only reduced by 10k 😀 I understand that fotocasa remove properties after a period of time to ensure that it doesnt fill up with sold properties, so obviously it was still up for grabs.

    But I think that demonstrate something about the Spanish property market. Not sure what, but my guess is that mobility of labour in Spain is very low, that mostly old folks own the properties and only want to sell for the sake of their pensions and that the Spanish actually have far more patience than youd ever credit them for — especially if you study their driving.

    So anyway, whats happening to taxes in 2011? And dont we have a budget in September?
    See More
    14 hours ago ·
    #
    John Smith
    Edward,thanks a lot-this is more and more like the open university/uned for me…except I don´t need to do exams.
    14 hours ago ·
    #
    John Smith
    Adie-I´m looking at renting a new flat in Madrid:idealista is very good,except for that weirdly presented report some months back where they eliminated the properties which didn´t fit the criteria,BUT fotocasa,which is attached to segundamano does not delete.I realised this when I looked at the updated date and they´re months old and rented out ages ago,so not sure if they are reliable is what I mean.
    14 hours ago ·
    #
    Edward Hugh
    On idealista, this may be of interest:

    http://www.spanishpropertyinsight.com/buff/2010/08/20/supply-of-properties-under-200000-euros-explodes-in-barcelona-and-madrid/

    Actually Mark is a friend of mine, but he does seem to have a thing about t…he Spanish property market “bottoming”. As I say, looking at the US, and then the tax situation, that doesn’t seem very likely for some time to come.See More
    14 hours ago
    #
    Adie Pratt
    Nothing wrong with having a thing for bottoms.

    Where is our Monster these days?
    14 hours ago
    #
    Adie Pratt
    Oh, he’s quietly posting… Lets see if we can get him to roar 🙂
    14 hours ago
    #
    John Smith
    Yes,I have his page in my bookmarks-seems sometimes over-optimistic doesn´t he? But good reading though.
    You obviously get so many comments you may not have noticed someone posted it earlier on one of your pages but as you say it is hard to …keep up with both.See More
    13 hours ago
    #
    Adie Pratt
    Its a nightmare John. Edward, you are going to need to remove us all from friends forcibly, wont happen otherwise.
    13 hours ago
    #
    Edward Hugh Be careful what you wish for Adie. I’ve just got a guy who works for FB apply to join my friends. He is on holiday at the moment, but when he gets back…

    This could be an “insider job”.
    13 hours ago
    #
    Adie Pratt
    I think that makes sense, if they can “migrate” us all, it will be a good service from FB.
    13 hours ago ·
    #
    Luis Navarro
    Sincerely, I still don’t believe the gov is going to remove that fiscal regime in Jan 2011… What about an extension announced a few weeks before? (Let’s say, Jan 2012) Or even better, let the other party decide that when they have the chance after the elections…

    It is amazing how bureaucrats can manipulate markets as they please… That’s what is really disheartening.
    See More
    13 hours ago
    #
    Stephen A. Mendez
    It doesn’t take much to manipulate the market but it is going to take a whole lot more than manipulation to get people to buy in this market (US and Spain). It is also going to take a lot to get people to hire/give raises/expand or any of the other things necessary to get our economies going again.

    The more people lose their jobs, the more homes will be foreclosed on, the more people will join the ranks of the unemployed, the more insurance companies that backed mortgages will have to pay, the more governments will have to supply the have nots, the more…See More
    10 hours ago
    #
    Rafael R. Espina
    Optimistic, They shouldn`t be, i mean if you take a look at their figures you can see that everything is just getting worse, their plans are not working well, in the US you can see diferent signs and you can realized the recetion is still in process but, the unemployment rate is recovery slowly but firm.
    9 hours ago
    #
    Sam Costanzo The July home sales figure is meaningless because it follows the June 30 expiration of an $8,000 tax credit for home purchases.
    8 hours ago
    #
    Ravi Mahendra
    They may want to maintain a positive outlook to avoid the panic. I think that is what a lot of countries are doing – telling the people that the economy is improving, to ensure that everyone continues to spend. What else would a government do?
    8 hours ago
    #
    Stephen A. Mendez
    How does the saying go? If you repeat a lie enough times it becomes fact.
    8 hours ago
    #
    Brian Campbell
    I’ve been following the Spanish market (as a potential buyer) closely for a couple of years now. For what it is worth these are my main observations:

    – Asking prices are generally ridiculous. They have hardly fallen from the Dec 2007 peak. T…here is lots of anecdotal evidence to suggest that, where sales are going through, they are at a 30-50% disccount from peak prices.

    – There are no reliable price indeces.The official figures are laughable. Of the independent ones Tinsa is probably the best but it is still some way removed from reality.

    – The banks are supporting the market. They are trying to repeat what they did in the early 90’s and manage a soft landing. Given the scale of the downturn they are in real danger of being overwhelmed by bad debts.

    – The market is full of those, usually with vested interests, saying ‘The maket has bottomed, now is the time to buy’. They have been giving the same advice regularly for the past four years. It is as accurate now as it was then.

    – There are significant problems in the market with things such as illegal builds, land grab, etc. Any potential purchaser should trad very carefully and, above all, get independent legal advice. Not a lawyer suggested by the estate agent or developer.

    – Anyone who buys in the near future (12-24 months) is almost certainly going to lose money. This market still has some way to fall.See More
    2 hours ago ·
    #
    Edward Hugh
    Thanks Brian, I think these are very sensible and realistic points.
    about an hour ago
    #
    Edward Hugh
    Here’s another reason we won’t see a rebound, the bank of Spain are changing the lending regulations.

    http://app.bde.es/clf/leyes.jsp?id=91943&tipoEnt=0
    39 minutes ago
    #
    Brian Campbell
    Ed, I’d like to copy this over to Spanish Property Insight as those who are not registered as your friends can’t currently read it. Is that ok by you?
    9 minutes ago
    #
    Edward Hugh
    Brian, go right ahead.

  • #100425
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    Anonymous
    Participant

    Exceptional post. I guess there is worse to come!

    This should be a wake up call to Spanish banks, developers and sellers alike. You are living on borrowed time.

    Buyers sit tight!

  • #100446
    Profile photo of logan
    logan
    Participant

    Absolutely. Sad thing is you occasionally can still witness the odd buyer chucking away money on hopeless property buys believing they found the buy of the decade.
    The monster is still being fed with the occasional crumb. 😈

  • #100458
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    Anonymous
    Participant

    I wouldn’t call myself an optimist. I can just see that, for some segments, things aren’t as bad as they were, which isn’t saying much (but does suggest a bottom of sorts). Overall I’m pretty pessimistic.

  • #100459
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    Anonymous
    Participant

    @mark wrote:

    Overall I’m pretty pessimistic.

    You’d feel right at home in Ireland – we a land awash with pessimism!!!

  • #100461
    Profile photo of logan
    logan
    Participant

    @mark wrote:

    I can just see that, for some segments, things aren’t as bad as they were,

    I would be interested to know which ‘segments’ you see as improving. I personally see markets in Spain deteriorating everywhere. Deflation is the reality property owners will have to live with for years. Not just in Spain but across Europe.
    Denial is everywhere, particularly with agents, politicians and bankers.

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