8th May 2012
There have been many themes outlined on this blog about the credit crunch and its consequences and today is one of the examples where they come together in one place. Ironically some of the problems I will discuss today were considered successes at the time but to the more thoughtful there was always the issue of what would happen if as seemed quite possible the can that was kicked into the future found the future worse than the present. The future is not always better in reality and indeed not even in fiction as HG Wells' The Time Machine pointed out.
Spain’s housing boom that turned to bust
The situation here was captured well in a recent article on Bloomberg with a nice title “Madness in Spain lingers”. They went to Avila a town a mile North-West of the capital Madrid and here is a quote which encapsulated what happened: "It took 20 centuries for the center of Avila to be developed, and in the last 10 years they’ve developed twice that amount"
Indeed a town with a population of 171,680 saw this happen:
"Ministry of Infrastructure figures show 23,419 homes were constructed in the decade through 2007, with another 11,000 homes built there since 2008."
Of these reports suggest that some 19,000 of the homes are empty or unfinished and some streets end abruptly in fields. However in another familiar theme officialdom has decided to behave like an ostrich and stick its head in the sand and deny reality. Here are the thoughts of Miguel Angel Garcia Nieto the Mayor of Avila:
"Yes, there is oversupply at the moment because of the financial crisis and everyone’s gone back home to live with their parents, but it’s not because there is lack of demand. When the economy gets back on track I am confident the supply will be absorbed."
Could there be a more complete denial of reality? Er, actually it is because there is a lack of demand! And even worse we see the phrase “on track” which in my Euro area financial lexicon has become associated with subsequent financial collapse. It has acquired ever more ominous overtones as a predictor of future events.
If we move now to Spain as a whole we see estimates that there are now some 2 million unoccupied homes and new airports which have never seen a flight being moth balled. And we see that some construction is still going on as her construction sector has only shrunk from 20% of her economy to some 14%. I understand why Spain may have been reluctant to cut back more as her level of unemployment moves above 24% but what will they build? it provides a very Keynesian dilemma
This creates a big problem for those who lent the money for the boom
It requires little intellectual flexibility to figure out that the banks who loaned the money to build these 2 million vacant homes have a problem. As Spanish house prices fall they have a problem with their mortgage books too particularly if we move from official estimates of the price falls of circa 20% to unofficial ones of more like 40%! And if you read my more recent updates of heavy falls in industrial production and the services sector business loans cannot be looking too bright either. So to sum up via William Shakespeare:
When sorrows come, they come not single spies,
But in battalions
If we continue the Shakespearean analogy and look for the real “rub” we see this. Spain’s banks have taken onto their books around 329,000 homes/mortgages and provide 100% finance on easy terms for those who buy off them. But usually they have to pay above what is the market price which of course in a falling market only traps them further. So rather than being a shrewd central bank the policies of the Bank of Spain have in fact left her banks with an increasing debt overhang.
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