Marbella real estate market

Financial crisis, national debt and the Marbella property market

Share Diana Morales | Jul 25 2012

It sounds like a bit of a confusion, but naturally all of these things are actually interconnected. After many years of rapid growth we find ourselves in a deep recession that seems hard to get out of, so now more than ever we look to the economic indicators for clues and the so eagerly awaited signs of recovery.

Marbella real estate market

Financial crisis

It seems that economies, like the weather, follow cycles that historically alternate approximately every seven years. Recession follows boom and cools off an overheated economy, allowing prices to drop back down to sensible levels, companies to scale down and become efficient again, and encouraging new creativity and innovation until these factors together create the beginnings of a new recovery, and eventually the next boom.

I do not profess to be an economic expert, but like many of you I have been absorbing a large amount of information lately not only about the current situation but also about many of the financial and economic backgrounds. People tell me the cycle described above is a natural macroeconomic phenomenon, but what we are currently experiencing is something more reminiscent of the Great Crash of 1929.

They say it is the product of a financial crisis created by years of over-spending and over-consuming that was increasingly built on borrowed money. Companies, countries and individuals lost their heads and borrowed until debt levels rose to dangerous levels, but it was all manageable while corporate, private and tax income was good and the repayments could be made. Our rapid economic growth and prosperity were therefore built on debt.

In Spanish there is a saying: “Pan para hoy, hambre para mañana.” It means ‘a feast for today but hunger tomorrow’, and yes, unlike animals in the wild we didn’t put something aside for a rainy day while the going was good. When the speculative system started to unravel in the US it set off a domino effect that swamped the UK, the Eurozone and eventually most of the globe, creating a financial crisis that exposed the financial weakness of the Western states and their growing national debt.

National debt

What started as a crash of the corporate financial banking world has since mutated into a public sector crisis. At first the governments bailed out failing banks and even spent public money to regenerate their economies, but soon it was the governments themselves who were out of money, and increasingly vulnerable with spiralling unemployment payments and cash hard to come by.

At first Spain was one of the better off countries, with a public debt below the levels of Germany, France, the UK and America, but Spain was also more exposed to the financial crisis than most others after its property bubble burst. Now we are sitting on over a million unpaid for houses, fragile banks and a government that has to deal with the highest unemployment rate in Europe.

In spite of tough austerity and a drive to increase government revenue the debt continues to grow, yet still Spain’s national debt is barely worse than that of the countries I mentioned earlier, and much lower than that of Portugal, Ireland, Italy, Greece and Japan. So why is it that the ratings agencies rank it among the worst countries and it has to pay a premium to borrow money? The answer has got to be that the trust in Spain’s ability to pay its debts has dropped to such an extent that it is considered a risk.

Marbella real estate market

We could debate what can and should be done, or how likely scenarios will play out, but the reaction to recent events such as the Spanish bank bailout and the Greek election results show us that the financial markets aren’t as affected by short-term events as by underlying fears about Spain’s ability to repay debts. The answer therefore lies in the longer term, and the road to recovery will be a difficult one that will require sacrifices and hard work.

I believe Spain and many other countries are at an historic crossroad. Either we fight to protect the unique European values and standards that have taken so much sacrifice to achieve, or we give in and once again become a sweatshop like other parts of the world, but either way we will need to achieve growth to get out of this mess, and this time that will require some big changes. Whether you believe we should rely on austerity, try to stimulate the economy, or both, and do so by spending public money or dropping taxes is a matter for another discussion, but it is clear that Spain needs a strategy for recovery.

Naturally none of this is good for the property market, but there are some silver linings. For one thing, the drop in property prices and the value of the Euro makes areas like the Costa del Sol more attractive for buyers from the UK, Scandinavia and other parts of the world. Marbella also has the advantage of appealing to wealthy buyers who are generally less affected by the recession, and since this is a region that depends mostly on foreign investors it is generally expected that it will recover before the rest of Spain.

Quality property in good locations suffered very limited price decreases, and after Mallorca Marbella is the place with the lowest losses, which has softened the impact of the recession quite a bit. Speaking to friends and colleagues in various fields of business the feedback is that although things are still far from booming, this year has brought a certain movement and energy with it that we haven’t seen for a while. It is still too early to speak of an economic recovery, but with all that it has to offer an international clientele, Marbella can feel more confident about the next few years than many parts of Spain and the developed world. Let’s hope they are not too far behind.

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