The result of Thursday’s elections in Catalonia is bad for the economy, and will drag down the region’s housing market whilst increasing the risk premium investors will use to value assets in the region.
After two months in the grip of a constitutional crisis, Catalonia went to the polls on Thursday to elect a regional government that Madrid hoped would abandon the independence drive, and unblock the political situation. It didn’t turn out that way.
The Catalan nationalist block pursuing independence lost the popular vote (48%) but won the possibility of an overall majority of seats in the regional parliament if the separatists parties can agree to form a coalition. That is highly likely, but not guaranteed, as the separatists are not a happy family. In coalition the separatists can reach a two-seat overall majority in the Catalan regional parliament, down from four seats in the last parliament.
So, we are looking at an open-ended period of conflict, instability and political uncertainty in Catalonia, all of which is bad news for the economy.
The ratings agency Moody’s has warned that the election result will weigh down on economic growth and “undermine further the already weak finances of the region” if the new government continues to pursue independence at all costs. 3,100 companies have already pulled out of the region, and more will follow. The economic cost of the independence drive is already clear to see. “The departure of companies, and the fall in consumption and investment has caused a fall in [economic] activity in the last part of the year,” says Joan Rosell, President of the CEOE Catalan business association, quoted in the Spanish press. “Only a new government that acts legally and respects the constitution can repair the damage done and return Catalonia to the path of prosperity that we all desire.”
This is just my take on the situation, and of course I could be wrong, but I think the damage this situation is doing is bound to undermine demand for housing in Catalonia, especially in places like Barcelona, where foreign buyers are an important part of the mix. A percentage of foreign investors will be put off by the conflict and go elsewhere, whilst local demand will be undermined by the mounting job losses to come, and banks will tighten up their lending criteria. Weakness on the demand side is bound to have an impact on prices, though who knows how much.
Catalan risk premium
It will not have escaped the attention of many international investors that separatists leaders in Catalonia have no respect for the law when in power, so Catalonia is now perceived as a riskier place to invest. Investors will now demand a higher political risk premium for Catalan assets, which means a higher discount rate, and lower current value for assets, including property, in Catalonia.
On the one hand this should mean that you can buy property in Catalonia cheaper than it otherwise would have been. On the other hand it might not be such a good investment in financial terms, though in lifestyle terms I think Catalonia will continue to be a privileged place to live or holiday regardless of the independence drive.
Thanks to the election result, this crisis looks set to drag on.