Spanish Economic Crisis

Spanish Economic Crisis – The beginning of the end for the Eurozone?

Greece has been warned by European Central Bank that it has a year to bring its government spending under control or risk having its sovereign bonds disqualified for use as collateral. This followed the move by Fitch Ratings on Tuesday to downgrade Greece’s sovereign rating to BBB plus.
Later the bond markets saw a rush to unload Greek sovereign paper.

Several other Eurozone economies have the same problem including Portugal, Ireland, Spain and the UK.
Spain, the 4th largest European economy, had its long-term outlook reduced by Standard & Poor from “stable” to “negative”.
The UK is in a slightly different situation, being outside of the Eurozone, in that it is easier to control its economy with a natural weakening of its currency and a low base rate, currently 0.5%. Obviously we are most concerned with the Spanish economy – we live here after all!

So what then is causing all this fuss on the bond markets? Quite simply the risk is that some countries will DEFAULT. Unthinkable right now but that simply is the fear; they won’t be able to pay and will have to default! As long as this fear exists the situation will only get worse and investors will require ever increasing profits before they take the risk.
Spain currently has to borrow more than it is producing because a dwindling number of contributors are having to support an increasing number of unemployed. Added to this there is the current attempt to create employment by investment in public works in a desperate attempt to “borrow their way out of the crisis”. Meanwhile the economy is still contracting and unemployment increasing.
The stronger European economies have started to expand and sometime soon the ECB will have to increase interest rates, currently 1.0%, in order to avoid inflationary “bubbles” and that will bang the last nail in the coffins of the weaker economies because they won’t even be able to pay the interest on their loans.

Then what happens? Well, the French and the Germans could say: “We were only kidding” and come up with a few billions, provided by their taxpayers, in order to wipe the slate clean – LOL.
Alternatively the whole European system could be radically restructured somehow with Euro1, Euro2, Euro3 etc. – another impossibility?
With the different economies growing further apart on practically a weekly basis there only seems to be one option and that means the break up of the monetary system; that is unless a solution can be found very, very quickly.

So getting back to Spain again or hanging on and staying here; and it’s a good a place as any to be if it is possible to hang on or get back.
There are two simple solutions, neither of which is easy – 

1. If the Euro is still here in 5 years time then the Spanish workforce has to tighten its belt, live “off the land” and do a lot more for less salary.
   
   
2. “Throw in the towel” get out of the Euro, partly default by introducing the New Peseta, allowing it float downwards, and spend the next 10 years being poor, proud and happy – just like we were in the 1980’s.

I would go for the second option. Spain has some valuable natural resources that could, once again, be exploited if the cost of living here was lower.
Now there is another (natural?) resource: 1.6 million empty homes that could be occupied by tourists or retirees. They could buy or rent them, it makes no difference. They only requirement is that the price is reduced along with the cost of living here.

Homefinder

Homefinder

tricky one eh?  I can see the advantage of getting out the Euro, but If the Peseta came back and floated downwards, wouldn't that make it even harder to pay of current level of debt, as well as making Spain and its people very poor for quite some time?

Goodstich44

You missed the bit about partial default! The New Peseta would start at 1:1 and every Euro of debt would be fixed at 1 New Peseta. It would be slightly more complicated than that because the floodgates would open and we would have Drechmas, Punts, Pesos, Lira as well. Even then it would not be so bad. Lots of bond holders would sell to cut their losses, others would buy them up cheap for a long-term investment.

The mediterranean economies would be back the way they were before they got these silly ideas about "one size fits all". Hard up and happy!

Logistically impossible? Not at all and they are probably working on it now. Day 1: The new currency is fixed to the old, the banks start swapping and the notes go bak to where they came from. Those of obsolete currencies are destroyed. Day 90 (or so): The new currency starts to float.

Homefinder

Homefinder

sorry, yes I see what you are saying but wouldn't default bring its own penalties?

 To be honest I am amazed it has lasted as long as this. Northern European countries and Southern European countries are completely different. How anyone believed they could all progress at the same rate is beyond me. I think carrying on in the current vain will only lead to real hardship for Spain, Portugal, Italy and Greece. Maybe the answer might be a south European Euro as well as a North European one. I would favour Spain getting a NEW Pesata, on its own, and let it float until it finds a level that encourages inward investment. I really don't think it would take that long! A lot of North Europeans have the dream of moving south both for the climate and the cheaper way of life. I have to say the latter, being the cheaper way of life, has been none to evident recently. We only bought a place last year and have found it cheaper to bring items from the UK than purchase in Spain.

I fear that matters will be left to flounder for some time yet making recovery that much more difficult. Kevin

Kevin

"Would a default bring its own penalties?" Normally I think yes because the defaulter would be ostracised. However, if all of the countries I mentioned partly-defaulted at the same time, then others would just have to accept it as being less than the greater evil of total default.

I agree with you heartily about the cost of living here, it is simply not sustainable. I have lived and worked in Spain since 1971. I am now 67 and should retire but I have to keep working and running my business (Holiday Rentals) because all my investments have gone belly-up.

Interesting theory about the sub-economies and perhaps the plan could work. I think that there would have to be 3: Northern, Mediterranean and Eastern because each has a different set of problems.

Whatever, something has to be done and quickly because the situation seems to get worse by the day. One thing I don't understand is why such sensational posts don't get more attention but perhaps it is because most people don't understand. I first wrote about the developing property bubble in 2004 and my message was "Stop now before its too late". I was only thinking of Spain and had no idea that the same thing was happening all over. Had I know that I would have sold everything I had, rented and been a wealthy man now. As it was it seemed to me that they were just building a few houses too many, which would eventually cause a minor, local recession.

My 2004 Article: Spanish Real Estate Crisis Unbelieveable what I said then, silly really -

What will happen to Spanish Construction?

I believe that the Spanish Economy, especially Tourism and Construction are heading for a serious recession. Hopefully it will not be as severe as in the ’90, when property values in coastal areas fell by more than half. A recent article suggests that prices will fall by up to 20 - 30% hopefully it won’t be worse than this.

Homefinder

I think I've lost the will to live....................................................

 A partial default would be better than a total collapse. It would be in everyones interest to see that the countries having the biggest problems have a soft landing. On reflection. I do think your right about a three way split.

Hopefully the property market will pick up in time and hopefully your investments will turn out to be worthwhile. As they say hindsight is a wonderful thing. 

I do recall there was a slump in property prices a few years ago in Spain and it bounced back fairly quickly, you no doubt will recall as you have been in Spain since 1971. Prices do seem to go in a cycle and it is difficult to know when to get out. We bought in Spain last November hoping prices had reached the bottom. Our neighbours in Spain were shocked at the price we paid, months later they were selling for less. We would all be millionaires if we could all jump at the right time.

I think the property market will pick up again in Spain as the UK property market improves. The dream for lots of people in the UK is a home in the sun and I don't think that has changed. It maybe that future buyers will be much careful about what they buy.

I don't understand how a Spanish family, where incomes are less than half those in the UK, manages to survive? 

Kevin

Kevin

i'm not sure the historic cycle will repeat itself this time?. The overbuild/debt situation has never before been in the equation, and neither has the awareness of all the other well reported potential and real problems facing the buyer of spanish property. As you say, when the other economies pick up, it must help, everyone loves a sunny place, especially brits!, but unless Spains government starts to inspire confidence in potential buyers, rather than dismay with their treatment of those who have been victims of the property market, then it's hard to see improvement, quite possibly the opposite!!

 Well, historically, house prices do have a cycle, whether in Spain or elsewhere.  The problem has been that a lot of people forgot about the cycle and expected house prices to continue rising at the same rate.  So for example, in the UK, the cycle has been that house prices double every ten years.  And looking at the house I have lived in for 20 years that is exactly what has happened, in spite of booms and busts.   During the boom years people were expecting tripling every 5 years or so, and while that may form part of the cycle, you have to be luck/clever to take advantage.  I am very anti people buying homes anywhere just to make a profit, and I don't know when we all started to view the house we live in, or use for holiday homes as being a short term investment, but I know that back in 1986 when we bought our first house abroad (France), it never crossed our minds that we might make a fortune.  We wanted a holiday home for our family and we achieved just that.

None of this helps people who are in negative equity here or in Spain of course, but I do think that over a period of ten years most people will find that they are not losing out.   And I do think that those who are caught up in the various housing scandals have, quite understandably, a very one sided view.  The fact remains that the majority of buyers in Spain have not had such problems and are indeed very happy with their purchase.  I would recommend the area that I have bought in, the builder who built it, and the type of property to anyone who asks.

I think there are many, many more English and Irish people who have been sucked into overbuying in England during the boom years on    the promise of a quick buck, facing difficulty. 

Bri

yes, house prices do of course have a cycle, but the cycle we have in the UK largely depends on price verses available funds, fueling supply and demand. On top of that most people want to know that the biggest investment they are ever likely to make is in safe hands. Spain is in a very different situation now on all these issues. As you say, I think most accept there's not big money to make, and people will always buy for lifestyle reasons, but in what numbers n future?, and at what price with over a million unsold properties, many not paid for or even finished?

I don't think those who have been caught out the scandals all have a one sided view?.  The view most of us had leading up to purchase was very positive, and often one sided in favour of Spain!  It was only when the reality of how bad the system has treated so many became accepted that Spain's reputation has suffered. Court cases for corruption and fraud stretch out years, with often no justice even after that!  

I don't think the current situation can be compared to history in Spain, and I think drastic measures may have to be taken to get out of the current mess?. Just my opinion of course, but based on the reality for many.

The buying of homes for investment really took when house values in the UK were booming and private pensions were decimated and returns falling. Many people like us bought property to fund retirement  in the long term not to make a quick buck. Had the pensions industry been in better shape we'd have saved that way instead. It now seems both are miserable failures but as mere amateurs we did out best! So people buy property for many different reasons. We can all second guess what is going to happen in the future, but I don't believe anything any more.

Regards, Poppyseed

Poppyseed

yes you're right, we did what looked like the best bet at the time based on advice from those who should know better than us amateurs. When you look at the Spanish property industry or see what a cock-up the so called experts in our banking industry have made, it indeed makes you wonder who you can take reliable advice from?.  Perhaps in future, our own hunch is as reliable as anything?

I do think that Brian is right and his attitude is representative of all of those who bought for the right reasons i.e. to acquire a property to enjoy and not just a short-term profit.

However, I still don't think that those who got caught up in the boom and have now lost out, either due to falling property value, corruption or actual fraud, are really to blame. The blame lies with those who made it possible. I do believe that most of those responsible for fraud and corruption will be prosecuted and eventually Spain will get its act together because otherwise they just don't have a chance of recovery.

However, the problems do not only apply to Spain and it still seems to be happening right now - Dubai!

At the end of the day we have to try to put it all behind us and move forward and the question I was asking when I started this thread was how and when. There are still a lot of people around like Brian. He had a holiday home in France, which he obviously sold, and now he has a holiday home in Spain. He says that he had no expectations about making huge profits but just to improve his lifestyle. There are still a lot of buyers around like him but they are all holding off right now and waiting for something to happen.

Basically the cost of living has to improve and we have to see signs that the property bubble has completely collapsed. Mr Shoemaker & Co are still saying that the Spanish economy is about to start to recover but I don't thk that they even believe it any more. The banks are still desperately trying to hold prices up because they are stuck with most of the unsold properties that they have either foreclosed on or swapped for debt. Meanwhile they are getting deeper and deeper into the red, unemployment is continuing to rise and Spain's external debt is continuing to rise.

Iceland was the first, Greece is almost there and Spain is slowly sliding down the slippery slope to bancrupcy. They simply have to face up to it, better sooner than later, because until they do that nobody will take them seriously any more.

Homefinder

 Most of us who have had a property for a number of years in the UK have made large profits on our homes. I never bought the houses we have lived in to make a profit or to get rich quick. In 35 years we are on only our third place. We have bought the property as a home and have lived in our current place for over 25 years and saw it as a place and area where we wanted to bring our children up. We are still in the same property.

We are now in our mid 50's and had been think for a long time about buying a second home in Spain. Because of my ill health we decided to look actively. With the price falls of late we felt it was a now or never time to get a holiday / retirement home. We had seen prices rise to silly levels over the years. They had reached a point were local people can no longer afford to buy. When that happens alarm bells must start to ring. Sure enough prices fell. However over a reasonable period prices in Spain as anywhere else have risen. I remember looking at properties 20 years ago and were then the equivalent of £24,000 and even in todays poor market they are worth over £100,000. It is difficult to determine the top and bottom of the property cycle. However, it is not impossible to make a stab at it. 

I do feel sorry for anyone that has lost out in buying a new property in Spain. However, the habit of buying a property some considerable time before it was going to be built was always going to have potential problems. I can remember going to see some and being encouraged to buy more than one as I would be able to sell it later, before completion, at a profit. It was a way to make money but you must be brave to jump into that type of deal. Would one do that at home? Well I wouldn't. I have tried to approach buying a place in Spain in the same way as the UK. We wanted a holiday home, we wanted a nice area, we wanted to see it finished with all the facilities in place, near the beach, near shops and restaurants. Once we found the place we were careful to make sure everything was in place before we finally bought the property. We have now owned the property for 13 months and love the place. I would not put anyone off buying a place in Spain. However, as at home one needs to be very careful and not leave common sense on the plane at Alicante Airport.

I think there have been instances were people have suffered fraud in the purchase of a property. Unfortunately Spain's legal system does not seem to be able to sort the situation out quickly. However, the same things can happen in other countries and is not solely a Spanish problem. Italy springs to mind as a minefield of problems! I'm sure there are also a number of people in the UK who have bought houses with structial and other problems and have little joy in getting them sorted. Just watch 'Homes from Hell' or the like on the TV! Even the UK legal system cannot protect an individual from fraud if the money has gone! Kevin

Kevin

The way you have done has to be exactly right. Of couse there are lots of stories about aborted projects with unfinished buildings, off-plan buyers who have fallen foul of dishonest developers etc. On the other hand there are lots of "enclaves" where development proceeded relatively slowly and buyers were able to purchase with complete security and enjoy their properties for half a lifetime.

Of course buying off-plan is risky and not only in Spain. However hard you try to sew it all up, with bank guarantees etc., there is still the risk of the developer becoming insolvent and years of uncertainty, without use of the property, while it all gets sorted out. The only sure way is to buy a resale property. Alternatively, in the case of a detached villa, at least structurally finished with all of the infrastructure in place.

I have lived (and worked) in Moraira, which is one of the "enclaves" I was talking about. I have heard of Playa Flamenca, never been there but I guess it is about the same. Life goes on in Moraira as it always did, in spite of the recession, apart from the fiercesome increase in the cost of living.
There is still a lot of interest in real estate and the surviving estate agents are rushed off their feet. The only difference is that they have to show 3 or 4 times as many properties as before to achieve a sale. What the hell anyway - they still get paid well for what they do!

Prices have fallen by 25% to 30% and sales have fallen to a quarter, or less, of the peak. New building just don't exist any more but there is hardly any land available for new developments anyway. Even if there was the developers simply could not compete pricewise with the resale offers.
I think what is happening now is that buyers are thinking "Sod it! If I don't do it now I never will" - just like you , eh?

I used to be a developer myself but packed that up when I came unstuck during the recession of the late-1980's. Now I have a holiday rental agency.  One thing I have noticed recently is that a healthy demand has developed for long-term lets. So it would seem that people still want to live here in spite of everything.

Homefinder

Homefinder

while some might be thinking  ''sod it, if I don't do it now I never will'',  the majority of people I speak to are saying ''I wouldn't touch Spain with a bargepole at the moment, I'll wait a year or two or untill prices bottom out, and the whole legal situation is improved and then look at buying again'' 

Each to their own, and I realise people buy for different reasons, but that's the advice I would give also.

 Homefinder, I have stayed in Moraira in the past and know it is a very nice upmarket area. We bought in Playa Flamenca partly due to the exceptional value offered by property and being within walking distance of everything. The property was a resale which made it even more attractive. It is around 12 years old and the urbanisation is kept in a wonderful condition with very modest running costs. So we are pleased and our two sons, both 20 something, love the area as there is lots of things for them to do and plenty of nightlife within walking distance.

Goodstich 44, I think the prices are probably almost at the bottom. House prices in the UK are starting to perk up and for many people retiring they have the chance to make some cash from the sale of their home in the UK and pick up a bargain in Spain. I have a feeling that prices in at least the costas is driven by sterling euro exchange rate. Last year when we bought we obtained 1.25 Euros to the pound. Since then our villa has fallen around 10%, however the exchange rate is under 1.10 Euros to the pound. In sterling terms the property has increased in value slightly. If sterling does increase in value over the coming months, possibly with the potential of a new government taking power, there might be a chance to grab a property in Spain at a great Euro price. Time will tell. Kevin 

As my earnings are in sterling and have a fairly large Euro mortgage I am trying to think ahead of the various possibilities.

If the Uk loses its triple A rating and does something serious like devalues the pound I could be stuffed.

If Spain splits in some way from the Euro (even to a Zonal Euro rate) how will I fare.

Any thoughts and advice welcome.

Bill