US property prices adjusted much quicker after the bubble burst, and the market has recovered much quicker as a consequence.
The Spanish and US housing markets were in more or less the same place in 2005: House sales were growing at around 5pc per year, and prices were increasing by between 10pc and 20pc. But when the crisis struck, and the bubbles burst, the two markets went very different ways.
US vendors bite the bullet
In the US, prices fell very quickly, to -5pc in 2007, and -15pc in 2008. Transactions also fell, by close to 25pc in 2007, and 20pc in 2008, but it’s reasonable to assume that transactions would have fallen further had vendors not accepted reality and dropped their asking prices so fast.
Which is exactly what happened in Spain, as illustrated by the chart above, comparing the US and Spanish markets since 2005 (chart by the Spanish bank La Caixa). In Spain, prices were still apparently increasing in 2008, but transactions had fallen by 30pc. So prices in Spain were kept artificially high at the expense of sales.
In the US, by 2009, the market was already growing again, even though prices were still falling by 10pc. In Spain, by contrast, the market is still shrinking today, whilst prices are now falling by double digits, though not as much as they did in the US when the market bottomed out (all according to figures provided by La Caixa).
In the US today, both home sales and prices are growing by an annualised 10pc, according to the research by La Caixa. But judging by the chart above, it will be at least four more years before that happens in Spain, if at all.
By denying the crisis, and keeping prices artificially high, Spain has dragged out this housing bust for longer than necessary. It is cheaper and less painful in the long run to take the losses on the chin early on, as the US did.
Thoughts on “US and Spanish housing busts compared”
Actually, with a bit more analysis it’s obvious that this chart is simply rubbish! The number of sales and real prices continued to fall in 2013 so the Spanish market is still well inside the shrinkage quadrant. Of course, the whole concept of the chart is to show that property, and therefore the economy too, move in boom-bust cycles in the short or medium term. Well, apparently not! Personally I think that Europe generally, not just Spain, is set for a long-term decline….it may be gradual, it may have the odd year that bucks the trend, but decline all the same…..
Interesting graph, but I wonder if the motivations in your interpretation are correct. The US fell fast and far because that is where the whole financial crisis kicked off. Banks were forced to give mortgages to people who were very unlikely to ever be able to pay them back. These were packaged up in to toxic financial instruments and passed around the banks with very few people understanding them (risk assessors who stepped off message got in to trouble). So when the hurricane hit and houses across the poor areas of the south were destroyed, the banks and insurance companies were left with liabilities and no assets. It’s quite understandable that other parts of the world hoped to remain relatively unaffected, while the banks and politicians were busy sharing the US and global banking misfortunes out to other countries.
So it was really only when the full impact on financial institutions had been borne by the EU in particular, that austerity measures were instigated to cope with the massive public and personal overspending that had continued right up until it was unveiled. Only then did it really start to hit home in Spain and the Spanish markets. From what I’ve been told the Spanish are notoriously easy going at keeping an asking price in place for ages without being bothered about a quick sale, hence the slowness to drop prices.
In addition, from my own observations of the shopping malls west of Madrid, it was clear that many in the middle classes were continuing to spend significantly (and perhaps retaining false hopes in the markets) right up until 2011. The malls were still heaving. It was only in the past 18 months that there was a noticeable drop off in the crowds as the impacts elsewhere finally had a knock on effect on the well off.
That delayed effect will mean a long delay in improvement especially because of the structural differences in the market (overbuilding, banking reposessions, changes in the population when many from South America returned home, etc). The US in contrast, would have been helped in recovery (painfully) by the fact that their housing was destroyed, required re-building (economic stimulus) and did not have the surplus that Spain has.
Mark, your absolutely right about one thing, the peculiar Spanish attitude in not recognising the reality of what the true value of a property is in a given market scenario. In a falling market adjust down, no chance, they are more likely to raise the price. Very odd!!