The pain in Spain is mainly on the wane

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The pain in Spain is mainly on the wane


News Article Date: Tuesday 01st of May 2007

Could you use another gin and tonic?
Signs that the Spanish housing market is about to implode are jangling nerves among some Brits.
An lot of previously smug owners of holiday homes, not to mention deeply tanned expats, are worried sick.
Last week, shares in Astroc - a Valencian property developer - fell sharply. That sparked a wider sell-off in Spanish housing-related equities, leading to fevered talk that the property market itself is about to crash.
Around 250,000 Spanish homes - a third of the country's tourist properties - are British-owned. If prices do tumble, some of us could end up being burnt by our place in the sun.
While that's worrying enough, much bigger questions loom. What would a property crash mean for the Spanish economy - the fifth biggest in Europe? And if the music stops in Spain, could the same thing happen here?
Spain's property market has certainly over-heated. Since 1997, house prices have risen by an incredible 170 per cent. The resulting wealth effect has led to Spaniards borrowing more and more. Households, on average, are now shouldering debts exceeding 120 per cent of annual income.
The big concern is an over-supply of housing. The Spanish are building 620,000 homes a year - four times more than the UK, despite Spain having 20m fewer people. The number of new Spanish homes is expected to reach 800,000 this year. So there are justifiable fears not only that the market will run out of buyers, but that, if prices do drop, deeply indebted owners will be forced into distress sales, causing prices to fall even more.
That's why Spanish investors are worried not only about property developers, but lenders too. Last week's panic caused the share price of BBVA, Spain's second-largest bank, to dip on fears it could ending up swallowing a bunch of bad loans.
This wobble on Madrid's markets was made much worse because it came at a time when US real estate is suffering. But, amid all the doom and gloom, it is easy to lose sight of the bigger picture in Spain.
For one thing, while the share traders were screaming and the expats were fretting, data was published showing that during the first three months of this year, Spanish house prices rose at an annual rate of 7.2 per cent.
Yes - that was the lowest quarterly rise for a few years. But that's a good thing. Property prices are slowing in Spain, as they will soon slow in the UK, but that is very different to an actual fall in property prices. I don't think Spanish prices will fall - and here's why.
For another, the market has been steadily adjusting for the past two years, with no sign of a collapse. The years of dangerous double-digit house-price growth have gone. Since 2004, the rises have been smaller and, therefore, more sustainable.
Also, the US and Spain are different. America's real estate turmoil has been caused largely by greedy lenders extending loans to borrowers with bad credit-ratings - the so-called "sub-prime" market. Spain's sub-prime market is minuscule in comparison.
It's worth knowing, too, that the initial cause of last week's panic - Astroc's falling share price - was caused by something specific to that particular developer. The company revealed in its accounts that it had sold assets to its chairman - raising suspicions that it was trying to falsely support the market.
I accept that in some hyped-up Spanish holiday destinations there is the possibility of a small outright fall in prices. After all, there are lots of new properties around and, as a destination for home-buying sunseekers, Spain now faces competition from the likes of Bulgaria, Turkey and Morocco.
But even if prices do fall in some isolated areas, most British owners, having enjoyed large annual gains on their Spanish castles in recent years, will be able to ride out any storm.
Across Spain as a whole, though, I strongly suspect prices will continue to grow over the coming years - and, thankfully, more slowly than they have. And that's why the broader economy will do just fine.
Spain's economy grew by 4 per cent last year. A less frothy housing market will reduce GDP growth to 3.5 per cent, or perhaps slightly less. But that should be a source of relief, rather than concern.
Last week, Miguel Fernández Ordóñez, the govenor of the Bank of Spain, tried to calm a nation which, having looked at the shares of the property developers, was worried that house prices were about to collapse.
"You know what the stock market is like," said Ordóñez. "It's calm one day, goes up the next, goes down the day after that. It's not always grounded in reality".
Some Brits exposed to the Spanish property market may scoff at Ordóñez's laid-back language. You wouldn't hear that kind of thing from the Bank of England or the US Federal Reserve.
But, whatever you think of his diction, Ordóñez is right. Gin and tonic, anyone?

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