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25.04.2007
A short note on the Spanish housing bubbleI have expressed scepticism about the sustainability of the Spanish property market for some time, but what we have been observing on the Spanish stock market over the last week is not yet evidence that the bubble has been pricked. Before I explain this in detail, just take a look at the following two charts.
The first shows the Financial Times index for the Spanish construction and materials sector, which is clearly showing that the bubble continues healthily. The second chart concerns two well-known Spanish construction companies (I picked the two on the grounds that they are relatively well known). This shows, in the case of Acciona (remember these are the guys who are part of the consortium with Enel of Italy, who have defeated Eon’s attempt to take over the Spanish energy group Endesa). There is no crash in evidence for Acciona. The second time series concerns Sacyr Vallehermose, which is currently bidding for Eiffage of France, and whose shares did go down by some 8% this week. But then, you can see from the chart that this is merely a blip if you look at a period of six years.
What to some people already feels like a crash, is in fact not a crash at all, not even the beginning of the crash. If, or rather when, this monstrous stock market bubble collapses, those charts above will look a little different, more like inverted U-Shapes. We won’t be arguing if this is a “crash” or a “correction”, as we do now. It will be very obvious to everybody. Spanish property prices have risen at an annual rate of 7% during the first quarter. What appears to be a reduction in house price growth to a more sustainable level, is more likely to be a transition from bubble to bang.
As the monetary tightening in the euro area continues at least until the summer – and with the usual lags until this filters through to household borrowing – we have a whole year of a credit squeeze ahead of us. As in the US, we will see that first price rises moderate, then go down to zero, and then fall. After that, we will get the same problem with subprime mortgages, and all the political and financial implications that will follow from this. This is going to be really ugly.
In the meantime, betting against the Spanish construction sector seems one of the sanest investment choices one could possibly make in Europe. There was an interesting article in the FT on how investors can exploit this madness to their advantage – short Spanish consumer titles (I would add construction titles as well), and go long on German titles. We are not giving share tips here, but Spain is a crazy market – and despite what happened this week – Spain is still crazy. |  |
Comments
Sancho Panza from UK
Friday, 04-05-07 14:01
The recent drop in real estate stock prices last week has brought the debate to the front pages. Long-time bears finally have had some solace, after years of seeing how carefully thought economic arguments were trounced by a defiant reality. As one of those bears I, too, have been tempted to claim a small victory. But I don't think we should confuse the stock market with the underlying real estate market. Both of them are currently experiencing a bubble, yes, but I believe we will see different outcomes in each.
The stock market has liquidity and processes information quickly. Last week's mini-crash came as investors recognised that there must be a limit to insanity, even in Spain. The fall of Astroc (the real estate developer that sparked the crisis as it lost 60%+ of its value in 3 days) was triggered by reports that most of the company's sales were done to its main shareholder. The tremor hit other Real estate and construction companies too, but they still trade at what many people would call "ridiculous" multiples. I expect there will be many more, harsher corrections in these companies, but these will come as news from the economic front are built into investors' expectations. The real estate stock market bubble will probably burst, rather than deflate.
The underlying real estate market, however, will likely not burst. I am not even sure it CAN burst. Liquidity is low, transaprency is scarce and most players do not have the incentive to increase either of them. Cultural aspects also play a part. Spain has the highest home ownership ratios of all the OECD, plus a traditionally credit--shy culture that, (though somewhat less strong after 10 years of cheap mortgages), still puts a LOT of value in keeping your mortgage payments up to date. I think the most likely scenario is a combination of the typical housing slump features (longer selling periods, low or even negative price growth, slightly higher non performing loans -especially for second homes-, tightening of underwriting standards), and a general slowdown in the economy as a whole, as borrowers gradually reduce consumption of other goods to pay for their houses. As a result, consumer companies (especially things like leisure, luxury goods, etc) will suffer. Construction and torusim (the two engines of the Spanish economy) are bound to fare badly, which could increase unemployment and further the slowdown. In theory this could all tailspin into a vicious cycle that would end up having, as one of may negative results, a real estate price crash, though I think the government (whichever it is at the time) will do everything possible to avoid this. But the damage will be done either way. A slow "deflation" of the bubble could well be even more damning than a burst.
Jan Luthman from UK
Thursday, 26-04-07 10:31
Much enjoyed Wolfgang’s blog today.
The collapse of the Spanish property bubble may prove even more dramatic – after all, many Spanish properties have been purchased by sun-seeking northern Europeans, and are overwhelmingly located in "holiday villages".
Such developments are effectively unsellable on the domestic residential market, since they tend to be located beside beaches, not places of work, and have no Spanish social infrastructure (schools, shops, centres of entertainment etc) or even resident Spanish neighbours.
Many foreign buyers are dependent, wholly or partially, upon letting income to fund their purchase. Over-build means that vacancy rates are already rising, and it is not difficult to envisage a self-energising vortex of despair, as distressed foreign owners allow empty, unsellable properties to sink into disrepair, rendering nearby properties also unlettable and unsellable until, eventually, entire developments become ghost ghettos – permanent concrete memorials to the follies of greed and gullibility.
Ultimately, the only solution may prove to be compulsory purchase and demolition.
Paolo di Montorio-Verones from UK
Thursday, 26-04-07 10:20
Spain set upon becoming the Florida of Europe a few years ago, with attendant property boom. As Florida is now at the epicentre of the subprime induced house price corrrection in the United States, it is likely Spain - which has the largest current account deficit in Europe at USD110bn last year (equal to over 70% of the German surplus) - will underperform the eurozone growth rate once the tightening monetary policy will be refelected in a housing price correction.
