Reply To: Spanish property market 2008: soft landing or train wreck?

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Dear Shakeel

I acknowledge and respect your views, without asking you or indeed anyone else to accept mine. What I have put forward I have done so in all sincerity. My army days have long passed me by and as I have written before on this forum the pen is mightier than the sword.

Where I am now I am approached by several investors, some of them Spanish and some of them from Spain. From what I read and from what they have divulged to me and from what I can see going on I have put forward my own thoughts. I remain firm on what I have written and on my current views. There is no compulsion whatsoever for anyone else to agree.

Four years ago the country which I am in now went through the same painful process and both the property market and economy collapsed, but it is a smaller country and the scale of the collapse more or less contained. However there is no immediate recovery in sight, other than in a few selected areas where there is demand.

My views are that the growth in both the Spanish property market and indeed in certain sectors of the economy has been fuelled by excessive debt. Colonial collapsing with three times the debt of its assets is just one example. This situation has been allowed to continue for too long as those who were personally indebted or who placed their own firms into debt, believed that the market would continue to rise and that their assets would grow in value, so as to comfortably enable them to meet their obligations and to work within the regulatory framework.

The risk they all took was that the market would keep on rising, and evidence suggests that from November 2003 the number of genuine buyers began to contract. We then entered a period of unacceptable business conduct on a scale which has thrown even the most respected analysts into confusion with false sales to subsidiaries and to family, with sales to speculators who misjudged the market, and house prices continued to surge. Rather like the wedding feast at Cana, the good wine was brought out last.

As so often happens before an outright crash, you get that final peak in the market, and then you have the eager bargain hunters who come in too early providing another false dawn and hopes rise. This was last summer. The stage we have now arrived at is one where bankers and analysts are coming to terms with reality and are having to take action.

2008 will be the year when banks return to responsible lending, and start to foreclose on non performing loans. The combination of indebtedness both at a personal and corporate level, a tightening of credit, a lack of liquidity and a falling property market with millions of homes which nobody needs or wants, plus with another 450,000 to 490,000 new starts estimated this year, has to be an uncomfortable situation on its own. Add to this that 13% of Spanish GDP is derived from the construction sector and the ripple effect its contraction is going to have upon a highly geared and heavily indebted economy with a falling property market, and you will begin to understand the arguments which I have put forward.