A Crisis Of Denial

One the dam bursts there is little you can do, except wait until the flood passes and hope it doesn’t do too much damage. The collapse of the bubble market in Spanish housing is becoming more evident with each fresh piece of news, to the extent that even the industry itself has finally been forced to acknowledge that prices are falling. The latest figures on completed sales show a dramatic decline and most predictions on what will happen suggest that the crisis will carry on at least through 2009, and may even get worse.

The IMF has suggested that housing prices in Spain could fall by as much as 20%, the industry estimates are of course lower than this as those who have most to lose attempt to minimise the scale of what is happening. It’s a delicate game in a market that depends so much on consumer confidence in what is going to happen, once you acknowledge there is a serious problem that also increases the risk of the problem becoming worse as buyers decide to wait for prices to fall further. Add to this the fact that many of the statistics now emerging on completed sales are already out of date; they reflect the position as it was several months ago. Meanwhile, the credit squeeze means that many construction companies and promoters are facing difficulties as they had severely overstretched themselves; the assumption always being that this bubble is different from the last one and that there is no end in sight.

Some of the effects of the crisis were reported on yesterday in El País in a piece focusing on the ridiculously unsustainable development carried out in Seseña and the enormous project of Marina D’Or in Castellón. Already advertising strategies have changed and all sorts of offers are being made by promoters in an attempt to shift what has already been built. Given the scale of some of these offers, you can only wonder about the profit margins many of these companies were working with when the market was booming. As if this wasn’t sufficient evidence of what is going on, it has now been reported that the huge quantity of €500 notes circulating in Spain has finally stopped rising, surely a sign that things are not going well in a sector awash with money of unclear origin?

The effects of the crisis are grim for those who have bought at a higher price than the market currently supports. The banking sector claims that it is in no danger and banks in Spain are required to provision quite heavily against potential problems. However, that security would become less sure if there was a significant increase in mortgage defaults. The good side of the crisis is that new buyers benefit from an end to constantly spiralling prices, and the determined attempts to extend the suburban frontiers of Madrid into all available countryside will hopefully be set back for a few years at least.

Each new economic growth estimate seems to be a little bit lower than the previous one and trying to deal with some of the consequences of the end to the boom is going to be the main economic priority for the new government. At times like these a balanced budget is no longer an issue, and investment plans can be expected for social housing and construction projects to try and keep the construction sector of the economy active. This will be accompanied by proposals to help mortgage payers in difficulties extend their payment time. No one currently knows whether we are talking about a slowdown or a slide into recession, but believers in the property bubble are few and far between these days.