@chris McCarthy wrote:
and seeing old friends who seem to feel that at last the market has genuinely hit the bottom. And who are not as desperate or doom laden as you might believe from reading the UK press.
“genuinely hit the bottom”? Your friends definitely are Estate Agents or Developers. Or very uninformed persons…
Tell them the following (taken from some Telegraph article):
“The banks are highly exposed to the Spanish housing market. After rising 270pc since 1995, house prices have begun to fall in parts of northern Spain, slipping 2.1pc in Barcelona and Madrid so far this year. Over 98pc of all mortgages are priced off floating Libor rates, causing mortgage payments to almost double in under two years. Construction has reached 18pc of GDP, more than Germany (15pc) at the height of the reunification boom.
David Owen, an economist at Dresdner Kleinwort, said Spain was in danger of a serious crisis. “House prices may fall, but what is even worse is that the corporate sector’s deficit has grown so large that it needs to find financing equivalent to 10pc of GDP every quarter just to stand still,” he said.”
The 270pc increase since 1995 is to compared to the expected 100% from a normal 5% per year. That means that say a 50K apartment in 1995 is supposed to cost now 100K. But the 270pc increase means that the same apartment costs now 185K (at least costed that much at the top).
So a 45%decrease from top to bottom during the crash will only ensure a return to the average, nothing more. The fact that things usually overshoot on the way down , together with the 20% expected unemployment, will ensure an average of 50% decrease from top to bottom.