The Spanish Housing Market: A contrarian point of view.

I've got a bit of time before my flight leaves, joining the Wife for a few days in Germany. She's there on a business trip and since things are slow right at the moment so I have time.  She's also commuting between Munich and Erlangen so I offered to do the drive for her. Ahhhh 2 hours of the wonderfull German Autobahn in a big Mercerdes ahhh!!!!, I can hardly wait. Spanish highways are crap, they give a whole new meaning to spagetti junction. Add in all the dips and bumps everywhere and it makes for crapy driving.

Anyways I've been thinking alot about the housing market here and decided to remove my Doom and Gloom cap for a bit. Spain may actually defy the laws of gravity and not see a housing crash. I put it into a seperate post to keep it more readable.



http://www.youtube.com/watch?v=wj6YGTelmVM

Dont' drive quite that fast.
BTW that was A RIGHT HAND DRIVE CAR, HOW SHIT!!!!!

This message was last edited by Rob in Madrid on 7/30/2008.

This message was last edited by Rob in Madrid on 7/30/2008.

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The Spanish housing market, a contrarian point of view

Generally speaking I’m Mr Doom and Gloom aka Peter Schiff, but I’m starting to have second thoughts about the Spanish housing market. Against all odds Spain my actually defy the laws of gravity for several cultural reasons.

First and foremost like Americans the Spanish are homeowners rather than renters  but unlike America bankruptcy still carries a strong stigma in Europe. The reason why the foreclosure crisis isn’t ending in America is very simple. You can walk away from your home today and tomorrow buy another one at half the cost. Why the hell pay negative equity. America is a culture that is based on wiping out ones debts and starting over with no stigma attached. Go bankrupt today and tomorrow there will be a dozen credit card offers in your mailbox.

To the Spanish owing a home takes precedence over everything, that’s why you seeing car sales collapse, restaurants going under but not a tidal wave of foreclosures. They do anything to keep the house. I actually have some friends in that very situation, bought at the top of market and they are suffering for it. The wife gave up her dream of being a SAHM to go back to work fulltime, they are very tight for money but in no danger of being forced to sell either place.

Secondly and rather surprisingly houses, at least around Madrid, are selling, prices are soft and it’s a tough market but I’ve have several friends who have sold places. For instance our hair dresser’s husband lost his job and they are being forced to sell the place as they can’t afford the payments (mortgage payments are up 400 euros a month) in spite of an asking price north of 500.000 euros (very nice place) and the fact that it’s outside of the city, they’ve had several serious offers. Problem is finding someone who can close. This has happened to several friends, it’s 3 or 4 serious offers to find a buyer who can close. I don’t know how anyone can afford the prices around here but offers are still coming in.

I’m not as familiar with the coast but in my impression is it breaks down into two distinct groups Spanish and British. The Spanish will simply wait out the market it will never recover but they won’t sell at a loss.

 

The British fall into 2 groups, in my humble opinion.

Top tier are those who’ve been here long term, well establish and unless they’ve mortgaged themselves to the hilt aren’t likely to suffer too much. Followed closely by the fifty something retiree with the tax payer funded indexed to inflation guaranteed for life pension, as long as the pound doesn’t hit par with the Euro shouldn’t be a problem. Main issue is, if after a few years of living in Spain they decide to return home. If they bought a house in the wrong area they’re very likely to have serious problems as it will be very hard to sell the place for what they paid for it.

The people (British) that are going to suffer the most from the housing collapse are those who bought investment properties in the last few years as the weak pound and recession in the UK keeps holiday makers at home. As well as those who moved here thinking they could make a living without speaking Spanish and have little resources to draw on. Been reading quite a few articles of recent about that very thing. It’s really sad because often the people have been here long enough for the kids to adjust culturally to Spain and they are moving back with no money no job and no future.

A lot of people have mentioned the Sun as another reason why Spain may escape and at first I was dismissive of the argument but the California experience tells me other wise. In spite of a major housing market meltdown California still has the lowest affordability in all of the US. Why, very simple, it’s a dam fine place to live and enough people with money want to move there to keep prices high.

My own opinion is, and this is where Mr Doom kicks in, is that the coast will suffer the most. Way overbuilt, bad reputation corruption etc means it will take years if ever for the coast to recover. The British areas, by far, will be hit the hardest. Madrid will escape relatively unscathed because the economy is stronger, more serviced based, and wages are higher here.

Unfortunately for the Wife and I the hopes of a 50% off sale are fading. It’s frustrating because prices are so high here (comparable to the south of England) and the property is carp. 500,000 pounds buys you a poorly built row house which leaks when it rains and the doors and windows don’t work half the time. And that’s not even in Madrid!!!!!

 

This message was last edited by Rob in Madrid on 7/30/2008.

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Rob

Thanks for your thoughts. As for your contrarian viewpoint I think you are just being a little impatient. Unlike the stockmarket, property markets take years to unwind. We are only just seeing the pessimism of the stockmarkets, who's job it is to look ahead, being realised in the true economy.

Property cycles are typically 10 years in duration, so it may well be 2010 before the market in Spain hits a bottom. You say the Spanish will sit on property for ever in denial, this maybe true, but only for those fortunate enough to own it without recourse to debt. What percentage are these mortgage free people?

For the vast majority with mortgages there comes a time when many will be forced to sell simply because they can no longer afford the finance, or its making their life a misery working all hours under stress. Don't forget that for many that bought in the last few years they have seen their repayments double, from rates in the 2s and 3s to 4s and 6s.

You can't have a situation where first time buyers and the young cannot afford to buy, because eventuially the market locks up. Chains cannot be completed. In this situation either wages go up substantially, or prices come down substaintially. I will leave you to bet on that outcome.

Trust me all areas of Spain will be affected, thay said central London (argueably the best and most robust market in the world) would not be affected. It is just starting. Volume of transactions have dried up to a trickle, this indicates a standoff.

High and unrealistic house prices have been an enormous drag on western europe, wether that be the UK or Spain. The resulting horrible cost of living has forced productive jobs abroad and is decimating our economies as wealth slowly and exorably gets transferred east.

The rise in house prices is all bad longer term. It never created any wealth for anyone, all it did was transffered the burden of debt from the property owning class to the next and younger generation. This generation and of course their economy will suffer badly as they struggle with this burden and increasingly get priced out of the productive labour market.

Rob I assure you that the cost of ownership even in Madrid will return to the cost of renting.  I'm sure wages in Madrid are much higher than in other parts of Spain, so property prices should be higher. But you cannot escape the fact that prices will return to the cost of renting. Paying twice as much to buy a house as to rent it is not sustainable and this should be your yardstick. You just have to be patient.

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Thanks TJ, have enjoyed all your posts. I was going to post this elsewhere but since you commented here. The Wife and I have been really struggling with the idea of buying or renting going forward. You're familiar with the main argument for buying, renting is just throwing your money away. But the two times we've bought real estate we've lost money. First in Canada, we bought  overpaid at the peak of the market and it took about 10 plus years to recover financially. Then in Germany, were the market has been flat for the last 10 years, we bought and renovated a beautiful apartment only to be moved to Spain less than a year latter (not that I'm complaining at all) and we won't ever move back there, we have good tennats but we'll never recover the cash we put out.

Now where back in the situation were we maybe moved again and the Wife is debating leaving the corporate world to become an English teacher. The debate, we're having is she could hold out another year or two and buy a property, but I'm hesitant, all our real estate adventures have wound up costing us a lot of money and we'd be signing in for another 30 year mortgage put us at 80 when it's paid for. The idea behind owing is you build equity it (or at least it's supposed to) cost less than renting.

Another question, does it make sense to be a renter in retirement? Will we have enough money coming in to cover rent in retirement, although I know many seniors who are house rich and cash flow poor.

Anyways what's your thoughts on renting vs owining?

As well being renters means gives us freedom from location, I can't honestly say we'll be here 10 years from now.

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Rob, don't ask TJ's opinion on owning against renting, it is SO well documented in EOS, isn't it TJ ?

(Likely in The coming worldwide credit crunch )

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Rob
I obtained a London Uni degree in property in 1965 and then became a Chartered Surveyor
In all that time 99.9% of the people who bought both in UK and in Spain at any time in the property cycle have done very well taking the long term view
Same applies now...yes be selective 

Ok it is not flexible and you may want to move at the wrong time in the cycle but economic property history points 99.99% towards owning.....of course you have to keep within what you can afford but same applies to renting

If you think that the EU and Western economies are ' dead in the water' for the medium to long term' then everything is a bad investment!!!

I worked and survived through the 3 day working week and power cuts in the 70's so have seen the worst!!.....except for WW2  !!!

I do not think so....circa 2010 EU property will start to look positive again.....also when you get to retirement the benefit of ownership is that all you have to pay is the local taxes [ high in UK relatively low in Spain] and running costs.....if you go solar then also much lower in Spain!!!

Buy location, location, location......so buying the smallest in the best location, if that is what you can afford is always better than the best in a poor location




This message was last edited by rowlandsbb on 8/12/2008.

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The best time to buy property is when it's in the doldrums and worse time is when people are out bidding each other to avoid being priced out of the market. Of course your emotions tell you the exact opposite. Just read a story about a Toronto couple who got out bid 15 times and had to almost double the amount of house they thought they could afford. Needless to say they bought at the top of the market and will spend years recovering financially

Personally I'm Canadian at heart, home is were the banks owns the house

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Rob, don't ask TJ's opinion on owning against renting, it is SO well documented in EOS, isn't it TJ ?


Lol - I will say it one more time and then that is really the last.

I am not against owning property, infact up until this year I had both a home and investment property in the UK. 

I still have a family home in the UK, but the investment property is gone for a very healthy profit. Its yield was a nett 2% and so it only made sense holding it when property was going up. We intend to keep the family home because its just that a home and was bought some time ago when buying property still made sense.

When we moved to Spain it made sense to rent rather than buy for so many reasons its hard to know where to start. We are enjoying all Spain has to offer, but not suffering from the crashing property market, to listen to some people on here you would believe that you had to own property to enjoy the lifestyle lol.

The rent we currently pay is half what it would cost us to buy, and that does not include taxes and furnishing the place. When you arrive in a new country you have no idea where you would be best suited, or indeed if the country is for you. It might be that you love the place, but cannot make ends meet cos of the jobs situation and very low wages on offer, if you can even get a job. I wonder how many people are in that position and finding that not only do they have to go home, but as a double whammy they can't sell the house without taking a massive hit, something they may never financially recover from?

But even if I was in exactly the right place and thought I was going to stay forever I still would not buy at the moment.

Why? Not because I'm against owning, I have own multiple properties in the past and still have a home. 

I'm not buying in Spain because its a disaster waiting to finish. The foolish  easy credit conditions and influx of cheap foreign money caused a condition where property was not only in massive oversupply, but got bid to levels way out of line with value. Buy a home in Spain and rent it out and its your retirement pot as well. No need to save like people did in the past - do it the easy painless way. Infact why not buy 3 and pay for the first with the profits from the others.

The fact that an average propery in the CDS cost 10 times local wages and young people could not afford a home, seemed to pass people by.

The problem now is that property once it starts its slide on the downward slope will go past fair value and head for cheap, unbelievably cheap. Most of the apartments built in the last few years in non descript areas with none of the usual attributes of location views etc, will be unsellable at any price.

The Spanish economy is a disaster. With 20% of the work force either directly or indirectly employed in houseing, it will be lucky not to have double digit unemployment in 2009. The whole miracle economy was a mirage built on debt, not true wealth.

I'm still trying to work out wether Zapatero is a idiot or a crook. Not so long ago he said "Spain has now joined the superleague of nations" and much more daft - "Spain is now growing so quickly it will soon be richer than Germany".

The last statement is so absurd its sad. Germany is a nation that has built real wealth from manufacturing and technology. Its brands are so sort after BMW and the likes are wanted all over the world. This has taken decades of education and training and hard work by educated people.

To think that you can get there in a short few years by a houseing boom built on nothing but cheap credit, is frankly naieve or stupid, not sure which.

Far from being in the super league and far from creating wealth, the end result will be poverty and hardship and a reduced standard of living. This year is just the start unfortunately.

Property will be fair value when it costs the same to rent as it does to buy. Property will be good value when the rental yield is circa 10%.

I will say one more time - if you currently own a home in Spain and you can afford it, then its value may be of little consequence and the main thing is that its your home.

But this is a very different situation from commiting new money to this current market.

Rob - in short I think its great to own a home, but as you have found its not great to overpay. My advice to you is to let property come to you, your wait may not be too much longer.

 

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Having lived here for now two years I can understand why everyone wants to move here, the Sun always shines, and the heat is always dry. Got an email from some friends in Texas, home for the holidays, 120 degrees and high high humidity, they said it's horrible, they really wish they picked a different time of year to go back!

Our original goal when we first moved here (after recovering from sticker shock over house prices) was to save up enough money to buy a place cash, that our timing happened to coincide with a housing bust suited our timing perfectly. Once we bought a place the wife could say goodbye to the corporate rat race and join me teaching English part time. I figured it would take us 3-5 years to save up the required cash. That would put the Wife right at age 50 when she wanted out. Cost of living is very low here when you have no rent to pay.

Unfortunately the credit bust and corporate restructuring put a halt to those plans. Her department/area is being shut down at the end of the year, while I'm not worried about unemployment she's been offered another position already, the problem is that more than likely it will be back in Germany. Her's being a typical German company, when things go wrong, pull everything back to Germany, and this time will be no exception. 

Now were faced with a dilemma, does she take a buyout at the end of the year and join me teaching English rent and forgo the hope of buying or move back to Germany for 2-3 save up enough cash and move back. Problem is having moved 4 times in ten years plus 5 years of being consultants neither of us are in the mood to move for a few years. We've got friends and a life here and don't want to start over again, getting too old for that stuff anymore. And needless to say the weather in Munich is like the UK, rains every weekend!

She figures she could stretch it out for an extra year by traveling giving us an opportunity to get a mortgage while she's still gainfully employed. The question is will prices fall fast enough for us. Like yourself I'm not willing to overpay for a place. Personally I'd be hesistant to rent as an English teacher, while the work is very enjoyable it's not steady and the pay is pretty low and rents are still quite high.

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