Spanish Property: The shadow of debt

We recently reported on Spain’s return to economic growth in the closing quarter of 2010, and pointed towards the technology-driven export sector that was the prime force behind this recovery. Indeed, to prosper in the years to come Spain will have to invest in a newfound ability to compete in the international export markets and sell specialist expertise.

Traditional staples such as tourism and construction will no doubt recover in the medium to longer term, but their importance is likely to diminish somewhat. The biggest hurdle in the short term, however, is the spectre of debt that hangs over the country, casting lender and borrower in a similar shadow.

Conspicuous consumption

During the good years, when Spain allowed itself to become too dependent upon construction and the accompanying speculation, prices rose steadily and loans were handed out freely. Returns were good for all involved and there seemed to be no end to the good times, but even then supply had already begun to outstrip demand quite considerably and a large proportion of the loans undertaken were top-heavy and hard to sustain in the long run. Moreover, the purchases in question were in many cases not a means of satisfying a true demand for the end product but rather a way of serving a speculative thirst that had permeated a significant proportion of society. Though this is even truer of the UK and Ireland than it is of Spain, the latter came to depend quite heavily on this model towards the later years of the boom.

Excuse the pun, but in concrete terms it meant that too many people bought in an overheated market. That is, overstretching themselves by buying at over-inflated prices and on the basis of the relatively high earnings and easy credit that marked the boom years.

Debt

Unfortunately people did the exact opposite, and now we face a situation where not only millions of people have lost their jobs or had to tighten their belts, but where many of them are heavily in debt at the very worst of times - paying off mortgages, credit cards and all other forms of HP that were wildly thrown at them a few years ago and which they, it has to be said, wildly accepted.

Credit is a vehicle for upward mobility during an economic growth phase but if you over-indulge you can land up in debt hell. It’s a situation that is easily reached but so much more difficult to escape from, especially if you belong to the lower income group. The crux of the mortgage issue therefore is that while the banks face large numbers of foreclosures on the part of buyers and developers, millions of people now face heavy repayments coupled with negative equity and a market where it is very hard to offload the burden. Though they have helped, even the drop in interest rates and conversions to interest-only repayments offer only limited relief – while the responsibility to service the loan naturally does not go away in the long run.

Getting out of trouble

Of course Spain is not unique in all of this, but it is disproportionately dependent upon construction and property (speculation), and therefore needs to restructure its economy, starting with education as a catalyst for the future. On the other hand, some statements in the media that a whole generation will spend the rest of their lives paying off properties that are now worth 20-30% less than when they bought them are a little overly dramatic, and typical of the same jump-on-the-bandwagon misery that was jump-on-the-bandwagon jubilation a few years ago. Given time, the property market will recover and especially in primary markets and in attractive areas like Marbella, prices will eventually rise to new heights, though capital gain in real terms will take longer to realise.

The situation is not great, especially in places like Manilva and Torrevieja, but fortunately there are areas that are less affected by housing gluts and falling property values, and they are also the ones that have retained their intrinsic desirability. On a national level, the Official House Price Index shows property prices dropped 3,5% last year, and though such official figures may be a little misleading they do show a slowdown in price declines. The market for primary housing in the large urban centres will also gradually recover as economic activity picks up again and the extant housing stock is gradually absorbed, though the sheer volume of the latter remains a worry, and the moves on the part of the authorities in urging the banks to deal with this problem will have to be followed closely, for they will profoundly affect the Spanish property market over the next year or two.

In the coastal areas, meanwhile, the price/quality ratio needs to be good enough to attract the savvy investors back in numbers, yet this will only happen when they think prices will not suffer significant further falls and a recovery in the buyer’s market is not too far distant. In all, the coming months will provide an important indication as to the direction of the Spanish property market as a whole.

Diana Morales, 05 Apr 2011 - News