Bubble Trouble in Spain?
Wednesday, April 25, 2007 at 10:40PM This is just a brief update to the post below which noted the recent sell off in Spanish stocks driven by real estate equity and whether the fizz finally is about the ebb out in Spain's housing market. As I also noted, Munchau was bound to be all over this and wouldn't you know it ... he is (sort of). First off though, you should drop by Eurointelligence's latest press review which has some useful links on the topic at hand. Tunrning it over to Munchau he has a brief note up in which he assures us that the worst is yet to come in Spain. Well I think we can all agree but the question is of course what to make of the recent spouts in the markets in terms of the future outlook. Here is a bear talking for you ...
What to some people already feels like a crash, is in fact not a crash at all, not even the beginning of the crash. If, or rather when, this monstrous stock market bubble collapses, those charts above will look a little different, more like inverted U-Shapes. We won’t be arguing if this is a “crash” or a “correction”, as we do now. It will be very obvious to everybody. Spanish property prices have risen at an annual rate of 7% during the first quarter. What appears to be a reduction in house price growth to a more sustainable level, is more likely to be a transition from bubble to bang.
Strangely, Munchau's graphs are of equity prices which clearly don't show any kind of major correction yet but as you can see they will soon if we ask Munchau. Perhaps we should also ask the question of why the housing boom is there in the first place? Yes I know, ultra low real interest rates and since they are now edging up we should of course expect things to cool down; I don't think that anyone denies that for a moment and in fact higher interest rates might actually suit Spain rather well but alas it might be a different story for Italy, Germany or poor Portugal. Yet, what about the underlying supply/demand dynamics in the Spanish real estate market? Anyone have that net migration rate figures readily at hand :) ? Of course, it does seem as if supply might be outstripping demand in the forseeable future measured by the new homes started (800.000) relative to the demand (600.000). Then of course comes the extent to which loans have been drawn up using the same Mickey Mouse regulation as seems to be the case in the US subprime mortgage markets?
Reader Comments (3)
I have to take issue with Eurointelligence's take on Tuesday's seeming disaster on the Spanish markets. For starters, his opening statement, "The collapse in Spanish property prices this week...," is a total, and slightly irresponsible, misrepresentation of what took place. It was the share value of property-related companies that took it on the chin. Property prices have not been reported to gave been effected as of today.
My own opinion is that are significant cultural differences between Spain and the Anglo-saxon world that mitigate against the pricking of property 'bubbles' in this country à la late '80's in certain parts of North America - that continent being the reference point in all the blather being posted considering imminent doom, and the like - that mitigate both against sudden and sever deflations. In fact, I can make a slight case against there even existing a property bubble here.
As for there having been one in the market valuations of related corporations, there is little doubt. How severe is it?... well, I don't think it compares with dot-com, for example.
There, to me at least, is some indication that short-sellers may have precipitated Tuesday's fall, availing themselves of a moment of inattention on the part of most participants.
There's more you know where.
Thanks for the reference on Tuesday.
CB
CB