Why the Spanish property bubble burst

As the dust settles on the mired property markets of Europe people are beginning to question how and why such a seemingly strong investment proved to be disastrous for many investors and families.

In Spain, the reason for the Sunshine State’s property bubble and its subsequent collapse, are being discussed and the answers provided make a lot of sense and carry warnings about the future behaviour of Governments, banks, developers and property professionals.

The conclusion so far from various debates by academics and industry insiders seems to suggest the Spanish economic miracle was a mirage, because the country was dedicated to building homes that people would not have wanted to buy had they known how little they would be worth in the future.

A house is only valuable as something in which to live. And if no one wants to do so, then it is not worth anything. Spanish, British and other north Europeans have purchased flats under construction or which will be visited only a few days a year, not because buyers were eager to consume housing, but because they thought they were a store of value for the future.

Furthermore, many banks and building societies provided big loans to developers and builders, many of whom cannot repay the loans and if they are allowed to go bust, could lead to bankruptcy for banks and cajas (building societies). Municipalities have enjoyed unsustainable revenues due to land reclassification and the waste to which they have become accustomed is over.

Cars and other consumer items that households bought during the property boom years were mistakes as they could not afford to buy because they were not as rich they thought. This led a complete distortion of the fabric of the Spanish economy.

Finally, as this kind of unsustainable activity has stopped, the economy has entered recession, although there are now a lot of well-priced bargain homes from Spanish banks and anxious, must sell owners.

Why did two successive Spanish governments and the Central Bank of Spain, despite numerous warnings on over-priced housing, not attempt to stop the bubble?

First, because the construction sector is labour intensive, which is important in a country with a high unemployment rate. Secondly, because an increase in the value of housing benefits the average voter, who is the owner of his home. And thirdly, because the real estate sector generates substantial revenue for the public sector at national, regional and municipal levels.

For example, in 2004, it accounted for 60% of the budget (excluding liabilities and current transfers) of Valencia and 50% of Madrid.

Lessons for the future? The best counter measure for house price inflation has got to be accurate price monitoring and production of benchmark prices at every level of the market. The Spanish Ministry of Housing has not been a reliable, accurate source and the replacement source, the National Institute of Statistics not much better.

Recently, the property registries themselves have been publishing the notarised transactions and the figures from TINSA, the big valuations company have been accurate and true reflection of prices gained from the frontline by their 3,000 frontline valuers.

There has to be increased planning credibility to avoid the disasters of the Valencia Land Grab and homes bought in in good faith being threatened with demolition because in retrospect the “planning permissions” granted by dodgy local mayors were more about revenue than community.

And Brit buyers should commit to a property in Spain only if they want a holiday home at a realistic price and to have lots of family fun and cool-out time while seeing an investment return over a number of years.

Now would seem an ideal time to grab a bargain, enjoy the fulltime or holiday lifestyle that comes with it and spend years immersed in the sunshine and culture of Spain...