[Anonymous]

Hi everyone,

I was told by a Spanish estate agent friend( a good guy) that the Junta have issued insructions to all Ayuntamientos that anyone caught doing work to their property without the requisite approvals is to have their water and electricity cut off! Apparently Sevillana are not agreeing to this but as the water supply is controlled by the Ayuntamiento meters are being removed. My friend knows of someone in our pueblo who has had his water meter removed. Now we all know that there are thousands of little “obras” going on all over the place and my pueblo is no different. At the risk of being cynical, it is interesting that the homeowner in question is a Brit! A bit like the German lady in Chiclana having her illegal house demolished when there are 35,000 to choose from. So be warned, if you are considering doing something to your house do check with the Ayuntamiento if you need a licence.

Saludos,

James

[mike]

@casalaloba wrote:

At the risk of being cynical, it is interesting that the homeowner in question is a Brit! A bit like the German lady in Chiclana having her illegal house demolished when there are 35,000 to choose from.

James

I’d be interested to know what the locals think about that. Do they consider the foreigners to be the cause of the problem and therefore fair targets? I noticed small, and I emphasise small, undercurrents of resentment with foreigners when I was in Spain but I can see it getting worse.

If property prices stagnate, not even fall, new construction will drop significantly and there are going to be a lot of builders unemployed at the same time that EU grants for Spain are stopped in favour of the new entrants to the EU. It’s normal when things go bad to make others a scapegoat and I suspect that the locals will blame the foreigners.

It may be OK on the Malaga coast where I feel that the Spanish have conceded that terrority as a necessary economic evil but inland and on recently developed coastline there maybe some resentment demonstrated.

By the way, the US subprime market is falling like skittles and is widely believed to be the canary in the coalmine. When the US economy falters then the Chinese have to consider whether they want to keep their dollars and if they don’t then US interest rates will have to rise to attract other investors and keep the value of the dollar at a reasonable level. So, with the US already struggling with interest rates at their current level they may be forced to raise them even higher. That might affect the global economy making the situation in Europe and Spain even worse.

Interesting times

[Anonymous]

Hi Mike,

An interesting post from you. I don’t detect any resentment to foreigners where I am. Interestingly, the biggest contract flippers here are local Spaniards. Our local market is pretty much dead due to the stupid prices being asked by (principally) Spanish sellers.

It is clear that the market is becalmed in most of Spain and a check on the Spanish property forums shows that asking prices are dropping everywhere.

Where is this all heading. Who knows. The market in the USA looks pretty dire but will problems in the “sub-prime” sector affect the non sub-prime sector? Will the downturn in the US market affect the UK and Europe? I guess the answer to the last question is “only if American consumers stop consuming” and this affects export markets elsewhere.

If the Fed reduces interest rates to support the housing market this will reduce the value of the $ and upset all the foreign holders of American debt. Equally, if the $ drops ,EU exporters will find it even harder to sell their wares,thus hurting the EU recovery( but is this recovery so real? I have my doubts).

There was an interesting piece in the Telegraph recently talking about looming problems in the local housing markets of countries such as Lithuania, Hungary and Bulgaria where people have taken out mortgages
backed by the Swiss National Bank who have borrowed cheaply in Yen and now interest rates have gone up in Japan making these loans more costly.

And what about the UK. The headlines about massive growth greatly simplify the picture. The demand in Belgravia,Notting Hill,parts of the West Country etc.may be off the scale, but in many other post codes the market is slow. I know this from friends trying to sell.

All in all the picture is pretty confused. If the ECB puts interest rates up again there will be people here in Spain in real bother. I did notice Sarkozy saying that the politicians had to take back more control from the ECB. This is probably tied in to the Presidential elections in France but others have been saying the same thing. The reality is that Spain and Ireland need higher interest rates than some of the other eurozone countries but the “one fit all interest rate” precludes that. Let’s be honest, unless all the eurozone countries have the same fiscal and social systems, the policy of a unique interest rate cannot work.

This is all a bit off thread. But perhaps not. The morosity in the Spanish market must to some extent be down to the introduction of the € which has made money too cheap. Therefore everyone borrows. Prices go mad, interest rates go up, The US market gets the jitters and no-one is quite sure where we go from here!

As you say, we live in interesting times. I recall back in the 70’s when there was a fear that the global economy was going to perish on the back of S. American debt. Things did not turn out that way. I guess there will be a few bumps along the way with the overvaluation and lack of quality in some areas. But properly priced good quality houses will still sell.

However, if you are a local speculator who has been left with the parcel, I suppose it’s only natural to blame those pesky foreigners.

Hope I didn’t lose you along the way!

Saludos,

James

.

[Anonymous]

James/Mike and

Vince (thread below)

http://www.spanishpropertyinsight.com/forums/viewtopic.php?t=2153

Your all articulating reasoned thinking and debate, can we get back to the usual fare of the forum! But meantime……

Globally there is a tightening of credit underway (following the post 911 credit party). Central banks are raising base rates, the yen ‘carry trade is unwinding’ and lenders are reviewing both their lending rates and criteria.

In the USA

No recession, plenty of jobs and relatively low interest rates. Can any one recall a time when sentiment in the property market turned from so positive, to so negative, so quickly (excluding the extraordinary event of 9/11) and in such benign economic circumstances?

The US is between a rock and a hard place, put interest rates up = big trouble, put interest rates down = big trouble. Never before have other countries had a bigger influence on the US’s economic destiny (China, Russia, the Middle East and Venezuela). Bush has been asleep on watch, distracted by Iraq (Saddam should have been retained as a counterbalance to Iran). Greenspan = boom and bust. Even if the Fed starts to reduce rates the course is already set for the property market to fall a lot further. Will the US go into recession I don’t know, but we haven’t had one for a long time and I can’t believe we’ve done away with them forever.

In Europe

Its likely Euro zone i/r will go up again by year end. IMO this will cause real problems in all property markets that have been driven by discretionary/speculative investors e.g. Ireland/Spain and ex Eastern block countries.

In the UK

None of this will of course affect the UK, as we live in a new paradigm, of New Labour where debt and consumption is the new saving, investment and thrift. No boom and bust here Gordon Brown promised us that 9 years ago. We genuinely have never had it so good. Taking on huge debts to invest in Buy to Let in the latter stages of the boom has no risks, as we all know property only ever goes up. So what if our kids have to pay £140k for a one bed flat whilst earning only £25k a year (5.5 x income) and not be able to afford to trade up to a family home as the rungs on the ladder get ever wider. In our day that flat may only have been £25k but we only earnt £9k pa (2.7 x income!).

We must keep this free money ‘wealth’ creation going at all cost, otherwise Gordon Brown will not be able to ascend the throne or worse still Labour may loose the next election.

To keep this thing going we need to find every possible way of encouraging people to take on ever increasing amounts of new debt to invest. Here’s a few ideas

Interest only with no capital repayment vehicle
Self cert fraudulent liar loans
4,5,6 and 7 x income multiple loans
30, 35 and 45 year mortgage terms
Low start teaser interest rate mortgages that go up after an initial period
Borrow the deposit on a credit card
Get the deposit paid/cash back on completion for a Florida holiday from the developer
Kids (25 to 40 year old) borrow deposits from parents
Parent guarantee the mortgage
125% loan to price sorry value
Etc, etc………

But the lenders are already offering all these, h’mm we the money lending marketing guy’s are going to have to get a lot more creative.

It’s a good job the UK doesn’t have a sub prime sector and that we don’t use the ‘new equity’ in our homes to subsidise our lifestyles, after all that’s what done for the US…..

Oh hold on, wait a minute…

between 26% to 48% of the UK mortgage market last year was sub prime (depending how you define it)! And to compound the problem Britons are Mewing (taking on new debt secured on their homes) at a rate of over £50 billion a year. That’s equivalent to 4% of GDP!

Perception of risk, easy credit (debt) and the fallacy of the one way bet::

Over the last 5 to 6 years many people have borrowed the kinds of sums of money (relative to their incomes) that only 5 to 6 years earlier, either wouldn’t have been lent to them (due to tighter criteria) or they wouldn’t have been prepared to borrow (due to the perceived risk of overstretching themselves).

Well something then happened to the lenders and now anyone ‘with a pulse’ seems to be able to borrow £100, £200 or £300k. Obviously lenders are in business to lend, so they reassess their risk profiles, lower the barriers to entry, relaxing deposit to loan and earning to price ratios. As for the borrowers of the last 6 years, they’ve only ever seen property prices rise and mortgage rates (as opposed to interest rates) headlining at between 2 and 4% (more of that later). Over time (and bombarded by Daily Express headlines and Channel 4 programmes that property is a sure fire one way bet) the sense of risk that buyers (1st, 2nd , 3rd and buy to let/second home owners) had about overstretching themselves is replaced with a “it makes sense to borrow the max to get on the ladder/make that investment now, before we miss the boat”.

Demand is like paper equity, towards the end of a bull run when sentiment turns it can just evaporate overnight!

Things are different this time:

It’s a popular urban myth that it was interest rates going up to 15% that caused the last crash and that (although not impossible at some time in the future) is not on the cards in the UK at present.

However what actually happened back then was this. Most mortgage borrowers were quite happy to borrow at interest rates of around 8% (I know it seems crazy today). When I/R went up briefly to 15% (they then came down quickly to around 13.5%). Mortgage rates increased to around 13.5% but quickly fell back to 11.5%.

Splitting the difference (13.5 and 11.5%) = 12.5% is (relative to what people were happy to borrow at 8%)

AN INCREASE of circa 50%.

Over the last 6 years or so people have been happy to borrow huge amounts of money because the effective mortgage rate available to them in the market (by rate tarting on say 2 year fixes) was around 2 to 3%. People are now churning off those fixes in their 100,000’s and finding the landscape has changed. You may now be able to borrow 125% of the value of your next Buy to let property and spend the difference on a new BMW X5, and a 1 week property investment trip Bulgaria, but rates have gone up. Many of the 2 year fixed rate deals are now 4.5 to 5.5%.Splitting the differences again (2 to 3%) = 2.5% and (4.5% to 5.5%) = 5%

AN INCREASE of circa 50%. It looks the same to me.

The difference between the last time and this, is that this time people have much bigger mortgages relative to their incomes, they have more unsecured debts and there are many more people stretched by entering the buy to let game without understanding their potential exposure.

appologies for the poor structure/wandering nature of this post.

The Sage of Omaha Mr Warren Buffet once said………….

“You only know who’s swimming naked, when the tide goes out”

Where’s my trunks……Has anyone got a tide table………..?

[katy]

Very good post, not rambling at all 🙂

[Anonymous]

Hi Pablo,

More interesting thoughts. When I bought my first house in 1980 I had to go cap in hand to the Building Society to get a mortgage. There was a bit of an old boys network at play. Your lawyer would talk to his chum at the BS and tell him what an upstanding professional chap his client was.Of course, in those long forgetten times, lawyers did rather well out of the interest earned on clients deposit accounts held with the Building Societies! The point is, mortgages were tough to get.

The liberalization of the lending markets is undoubtedly a good thing. Just like the effect of “Big Bang” in the City. But with liberalization comes an even greater responsibility to verify the credit risk of the borrowers. I wonder if the pendulum has now swung too far.

30/40 years ago the financial markets and the professional services sector(accountants, lawyers, chartered surveyors etc) were advice driven. Not all the advice was of the best quality but the participants were generally focused on giving their clients what they considered to be good honest advice.

Nowadays, we live in a “targets” driven environment where the focus is on “sales”. There is nothing intrinsically wrong with this approach so long as there are sufficient checks and balances in place to protect the health of the consumer and therefore the wider economy.

It seems that we now live in a society which has little fear of debt. Many buyers do not look at the price and pause to think if this represents value. Instead, they look at what they can afford ,thus decoupling price paid from mortgage contracted. I recall a conversation I had with a neighbour who worked as a currency dealer. He told me that the markets would continue to invent new ways of borrowing money and securitizing the loans. Maybe. But one day someone has to be repaid. Or am I missing something here? Grumpy old man syndrome possibly :)!

Anyone with half a brain knows that the New Labour economic miracle has nowt to do with TB/GB. OK, giving the Bof E independence was a good thing but the reality is that GB inherited a growing economy and the world economy, driven by China and cheap money, has experienced a long period of growth.However, just as things may be slowing down, GB has saddled the UK with increased taxes and public sector obligations which still have to be paid. The waste of taxpayers money under his mandate is frankly scandalous.

Time for a nice cool beer at El Bar Cadiz methinks 🙂

Saludos,

James

[mike]

@casalaloba wrote:

It is clear that the market is becalmed in most of Spain and a check on the Spanish property forums shows that asking prices are dropping everywhere.

I assume that the building work continues

@casalaloba wrote:

All in all the picture is pretty confused. If the ECB puts interest rates up again there will be people here in Spain in real bother.

Given that debts are not so easily inflated away these days I would say that it’s just a question of time when the problem occurs, unless we have entered a period of permanently low inflation.

@casalaloba wrote:

This is all a bit off thread. But perhaps not. The morosity in the Spanish market must to some extent be down to the introduction of the € which has made money too cheap.

I think money has become cheap because of the Yen carry trade. Someone mentioned to me that the last time we had 4.6% RPI in Britain actual lending rates were 8%. I know that is the UK rather than the eurozone but they are enjoying the same discount due to the Yen.

@casalaloba wrote:

As you say, we live in interesting times. I recall back in the 70’s when there was a fear that the global economy was going to perish on the back of S. American debt. Things did not turn out that way. I guess there will be a few bumps along the way with the overvaluation and lack of quality in some areas. But properly priced good quality houses will still sell.

I think the major economies will co-operate in order to avert the worst but we might suffer some pain in the process.

[mike]

@Pablo Silver or Lead? wrote:

In the USA

No recession, plenty of jobs and relatively low interest rates. Can any one recall a time when sentiment in the property market turned from so positive, to so negative, so quickly (excluding the extraordinary event of 9/11) and in such benign economic circumstances?

It’s amazing, isn’t it! Actually, Manhatten is seeing rising prices just as London is seeing rising prices. Due to financial sector bonuses?

@Pablo Silver or Lead? wrote:

The US is between a rock and a hard place, put interest rates up = big trouble, put interest rates down = big trouble. Never before have other countries had a bigger influence on the US’s economic destiny (China, Russia, the Middle East and Venezuela).

Your friend Warren had something to say about that too. He said that Americans might not like the reality of having to work to pay debts to foreigners. But he also said they’d get on with it.

@Pablo Silver or Lead? wrote:

Oh hold on, wait a minute…

between 26% to 48% of the UK mortgage market last year was sub prime (depending how you define it)! And to compound the problem Britons are Mewing (taking on new debt secured on their homes) at a rate of over £50 billion a year. That’s equivalent to 4% of GDP!

I wonder how much of that is going into the Spanish property market as a deposit on property

@Pablo Silver or Lead? wrote:

The difference between the last time and this, is that this time people have much bigger mortgages relative to their incomes, they have more unsecured debts and there are many more people stretched by entering the buy to let game without understanding their potential exposure.

I know professional BTL landlords in the UK who while not bearish on the UK property market haven’t bought in the past 4 or 5 years, they just don’t see that many properties for which BTL adds up. They are almost universal at criticising the 2 bed apartment much loved by the more recent BTL landlords. Granted that is not Spain but I do believe that 2 bedroom apartments are commonly bought there as investments rather than to live in

@Pablo Silver or Lead? wrote:

appologies for the poor structure/wandering nature of this post.

Great stuff, keep it coming

[Anonymous]

Mike,

Money was cheap long before the Yen Carry Trade which is very much in the news these days. The YCT has surely just continued the supply of cheap money. Theoretically this could all unwind and the pack of cards collapse. The cynic in me says that the powers that be will not let this happen.

I would love an explanation of why the property market, particularly in London, took off in 2005? I bought a lovely loft in Battersea in Feb 2001 and put it back on the market when I decided to come to Spain.From November 2002 to April 2004 I hardly had a visit. I received one offer from a Walter Mitty guy whose “cash” turned out to be the stuff of dreams. I then let the flat and sold it in March 2005 off the market to a friend of a friend. I got back the original purchase price plus stamp duty and made a profit of less than a £1000. It was a fair price as I had bought at the top of the market.

My point is, what was so different about the economy in 2005 from 2003 and 2004. Interest rates were heading up in 2005 and the City was doing OK in 2003 and 2004. But, overnight the market seemed to move from famine to feast.

I looked at Douglas and Gordons website for Battersea last November and again recently. The difference was staggering. In Nov there were loads of property for sale. By Feb 2007 virtually everything was under offer. This ties in with City Bonuses. Perhaps I’m answering my own question? Is the London market more and more driven by the success of the City? I suspect it is , so let’s hope the pack of cards has good foundations. As we all know, markets are driven by greed and fear. Get ready for the rollercoaster 🙂

Saludos,

James

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