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A Warning from Spain About the House Price Crash

Housing-Market / Spain Jul 23, 2009 - 06:06 AM GMT

By: MoneyWeek


Best Financial Markets Analysis ArticleDavid Stevenson writes: Almost every day, it seems, someone else wants to tell us the housing market's picking up.

On Tuesday, even the taxman had a go. Apparently the number of British homes sold (for more than £40,000) was up 15% in June compared with May.

That followed Monday's upbeat message from property website Rightmove that house prices are bottoming out.
Don't believe it. If you want a glimpse of just how badly things can go wrong, take a look at what's going on in Spain...

Spain's house price crash is worse than it looks

Right now there's clearly some 'statistical noise' in the housing market. After a sharp fall, prices stabilise for a while, which can give the impression there's a pick up underway. But anyone feeling like buying a house right now should take a look at what's happening in Spain.

Why? On the surface, the Spanish property scene doesn't look too bad. Ministry of Housing figures show just an 8.5% drop over the last 12 months from the mid-2008 peak. That's not so bad, given that Spanish house prices more than doubled over the previous 10 years. But the official stats are a long way from telling the whole tale.

The independent house price index compiler Tinsa reckons average prices are 13% off the top, and down 18% on the coast. But the word from developers and estate agents is of falls of up to 30%.

When you look at the earlier building boom, this is no surprise. Between 2001 and 2007 Spain went mad. The country put up 29% of new EU homes despite having just 9% of the population. The end result has been a glut of 1.5m unsold homes.

That sounds like a recipe for disaster – which of course, it is. Now that the housing bubble has burst, home sales have plunged by more than a third in the 12 months to May. Shedloads of developers have gone bust, owing billions to the banks. And said banks are now being forced into taking on rows of empty houses no one else wants.

Spain's new boom industry - bank robbery

Hence the next problem. With the number of properties for rent soaring by 55% over the past two years to 3.3m, the highest since Ministry of Housing data started, rents in cities have begun dropping for the first time in seven years - by up to 8% so far. "Those who need to sell but can't are being forced to lease" their old house, Fernando Encinar at, Spain's largest property website, tells Bloomberg. "We haven't seen this number of properties for rent since the 1950s".

Rents can only fall further, which will depress prices even more. The jobless rate, at 19%, is the highest in the EU and is set to climb even higher, which will only add more forced sellers.

And here's the extra scary bit – the recession is resulting in a very definite rise in crime. Bank robberies are up by 20% within the last two years. "People are committing offences through necessity, first-time offenders who can no longer continue to maintain their lifestyles and so turn to crime", says the head of criminology at Camilo Jose Cela University, Francisco Perez Alba, to the New York Times. As Jose Manuel Murcia of the Workers Commission union federation puts it, "Banks are denying credit. People can't pay their mortgages. There's unemployment, hunger - and there's money in the banks… so it's logical to rob a bank".

British house prices are set to fall further too

OK, this may be extreme. And it seems a long way from Britain's situation right now. For one thing, we don't have Spain's huge level of surplus property.
But rents over here are falling too, while the supply of rental property has shot up, according to data from And while Britain's unemployment rate is only 7.6% at the moment, the dole queues are bound to get longer. That will mean lots more forced – and desperate - sellers.

That's painful for the people involved, but it's not necessarily a bad thing. As we recently pointed out in Money Morning (House prices could fall another 40% from here), one of the main UK housing problems is affordability – or the lack of it. Prices are still way above levels where the market can rebuild from.

The Nationwide Building Society's first-time buyer affordability index, which gauges initial home loan payments as a percentage of take-home pay, is still miles away from a market trough if the last housing downturn is any guide.

So prices have to fall further so that new buyers can get on board. But that means that current buyers are likely to see the value of their purchase fall substantially before it bottoms out. That's bad news for anyone who's been persuaded to act as guarantor for someone else's home loan, for example - the

Council of Mortgage Lenders recently reported that in the past two years the percentage of first-time buyers being helped by their parents to put together a deposit has doubled to a staggering 80%.

Of course, not everyone thinks that things will get this bad. And for this week's issue (out tomorrow), we gathered a range of experts from across the property market, put them in a room together, and watched the bulls and the bears and the in-betweens slug it out. It's our first property roundtable since June 2008 (you can read that one here) and we think you'll find it very informative.

By David Stevenson for Money Morning , the free daily investment email from MoneyWeek magazine .

© 2009 Copyright Money Week - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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