Monday, April 11, 2011

The next course of Tapas is Spain

One by one, this is better than Agatha Christie.

(credit to the great Wolfgang Munchau)

Spain had an extreme property bubble before the crisis, and unlike in the US and Ireland, prices have so far fallen only moderately. According to data from Bank of International Settlements, real house prices in Spain – price per square metre adjusted by the personal consumption deflators – rose by 106 per cent from the beginning of monetary union and to the peak in June 2007. They have since come off by 18 per cent as of end-2010. Calculations such as these are sensitive to the starting date, but Spanish real prices were relatively flat throughout the 1990s, so this is a relatively safe starting point.
Where will it stop? I would expect all of that increase to be reversed. The total peak-to-trough fall would be more than 50 per cent, and prices would have to fall by another 40 per cent fall from today’s level. Is that a reasonable assumption? In the US, real house prices stagnated for most of the 20th century. Increased demand, through immigration for example, should not affect the price level, as long as supply can adjust.
The situation is different in countries with natural or artificial supply constraints, like the UK. But in terms of supply conditions Spain is more similar to the US. I have yet to hear an intelligent reason why Spanish real house prices should be any higher today that they were 10 years ago, and indeed why they should keep on rising.
The most important housing market statistic in Spain is the number of vacant properties, about 1m, which means that the market will suffer from oversupply for several years. This will be the driver of further price declines. Given the stress in the system – recession, high unemployment, a weak financial sector, higher oil prices and rising interest rates – one might even expect house prices to overshoot below the horizontal trend line.

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