A short note on the Spanish housing bubble

 

I 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.

 

source: Thomson Datastream

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.

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