The Denial on Housing in Spain
By Claus Vistesen
I am sure many of my readers will have caught this Bloomberg piece earlier this week, but if you haven’t it is a brilliant piece of journalism by Bloomberg reporters Sharon Smyth, Neil Callanan and Dara Doyle. The story takes us to Spain and Ireland and the former’s denial with regards its housing market.
In the stages of death of a real estate boom, Spain is still in denial. In Ireland, they’re moving toward acceptance. The first auction of one of 2,000 unfinished housing estates takes place tomorrow at the Shelbourne Hotel in central Dublin, with sales expected to fetch cents on the euro, showing the Irish may be closer to the end than the beginning.
“Ireland faced up to its problems faster than others and we expect growth there rather soon,” said Cinzia Alcidi, an analyst at the Centre for European Policy Studies in Brussels. “In Spain, there was kind of a denial of the scale of the problem and it may be faced with many years of significant challenges before full recovery takes place.”
Spain, Europe’s fifth-largest economy, is the current focus of attempts to contain the region’s sovereign debt crisis, as Prime Minister Mariano Rajoy struggles to quell speculation it will need a bailout. Developers are showing similar optimism. They continue to build even with 2 million homes vacant around the country, new airports that never saw a single flight being mothballed, and property appraisers and banks reporting values have fallen only about 22 percent, said Encinar, who estimates the real decline is probably at least twice that.
Another passage that was staggering to my mind was the comments by Miguel Angel Garcia Nieto, mayor of Avila (a town showcased in the article), that this is just an interim soft spot as a result of the crisis and that oversupply and overcapacity will eventually be absorbed.
“When we approved the first urban plan back in 1998 there was an unprecedented demand for homes,” Nieto said in a telephone interview on April 19. “Yes, there is oversupply at the moment because of the financial crisis and everyone’s gone back home to live with their parents, but it’s not because there is lack of demand. When the economy gets back on track I am confident the supply will be absorbed.”
Hope, as they say, springs eternal.
I do not think that Ireland will recover as quickly as expected. There are simply too many homes, for the remaining population. Then the problems with excess debt have simply not been dealt with at the personal level. Many are still paying for mortgages on overvalued homes, because bankruptcy in Ireland is so onerous. Once that becomes impractical there will be a surge in write offs.
Good point David, I think two issues are important to remember here for households in Spain and Ireland. They face BOTH and income and equity shock. Fundamentally, if your equity is wiped out as a household it becomes a very tricky issue for the country to deal with if this happens on a country wide scale.
I do think that the US and the UK will have similar problems. Both countries have significant numbers of home owners underwater. In the US a figure of 25% of mortgage holders is mentioned. In the UK it is above 14% of all house holds. The UK has not had a surge in foreclosures yet but there are significant numbers who are only holding on because mortgage tracker rates are close to 0.5%. Once interest rates rise then the numbers who walk away will surge. From what I hear the Dutch might also have large numbers that are struggling. That is not good for their bubble.
The real estate industry in the US has for decades created a virtual pyramid scheme in housing, leaving a few big winners while burdening families and lowering living standards for all but those at the top. The export of this unsustainable and phony business model, along with securitizations created out of thin air and sold to “suckers” in both the US and abroad have brought the world economy down to its knees. This is what happens when financial markets are created and run by the equivalent of used car salesmen of the worst kind.
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