SPAIN, IRELAND AND THREATS TO THE PROPERTY BOOM ©

Un interesante artículo sobre el mercado inmobiliario en España ahora que en los USA las cosas no van muy bien.


There are two phases in an asset price bubble that repeat themselves with clockwork regularity. The first is the phase of the bogus economic theory. I am sure you heard the one about the paradigm shift due to the more widespread sharing of credit risk: or the one about the profits/wages ratio rising indefinitely.
The second phase is a prolonged state of denial.
In the US subprime mortgage bubble, we are now in phase two. It is difficult to explain rationality why anyone would want to give out large mortgages to people with no credit rating, or why a bank would want to give out interested-only mortgages at more than 100 per cent of a property’s value to anybody. Most of those products are based on irrational expectations by lenders and borrowers.
The European Union is a little behind the US when it comes to such crazy financial innovation, but only a little. There is a subprime mortgage industry in some markets, such as the UK and Spain. You can also find interest-only mortgages.
Unsurprisingly, these are also the market that have seen the strongest increases in property prices over the past 10 years. The Europeans are still in phase one of their bubble. The bogus economic theory from Spain is that large immigration can maintain a construction boom indefinitely.
Let us just look at some statistics. In Spain, the construction and housing sector accounts for 18.5 per cent of gross domestic product, about twice as high as the eurozone average, according to the latest data from the EU´s Ameco database. The comparable figure for Germany is 8.7 per cent. The justifications given for this increase are: a new inflow of immigrants, many from Latin America, who find it easier to purchase, rather than rent Spanish property; changes in the Spanish way life, as young people leave their parental homes earlier than the used to; and Spain´s continued popularity among sun-loving northern Europeans. In other word, the Spain-is-special-crowd argues this is a structural boom, not a bubble. They claim that Spain´s property market can grow at faster rates for longer than most other European markets.
I do want to dismiss all of these points. The trouble is that these merely tell us why the bubble happened in the first place, not why the path should be sustainable. In Spain, the average price of square metre of residential property went up from about under €700 in 1997 to just under €2,000 at the end of last year -up threefold. House price growth has moderated more recently -from year-on-year growth of more than 15 per cent two years ago to more than 10 per cent now. It is true than Spain still has an extremely low level of mortgage defaults compared with the US. It is also true that Spain mortgage banks are relatively flexible in terms of their willingness to refinance loans. The again, Spain is in a different phase in the housing boom-bust cycle. Spain is today where the US was approximately a year ago.
In Spain, most mortgage are variable-rate, so the rise in short-term market interest rate to more than 4 per cent is beginning to have an effect on the Spanish housing sector. Monetary statistics tell us that the boom in European mortgage lending is slowly receding but this process still has come way to go. If as a likely consequence of the subprime mortgage crisis in the US, there is a global reappraisal of the price of risk, Spain would be hit by a double whammy-higher rates an higher spreads. […]

Wolfgang Munchau in Financial Times© MONDAY MARCH 19 2007