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Friday, April 18, 2008

The Spanish Grumble

The percent of Spanish GDP related to housing construction is much higher than ours, and unfortunately its housing bubble is deflating now too. Iberian Notes is a great blog if you would like to keep track of matters and don't read Spanish.

Estimates for 2008 GDP growth vary. The IMF thinks it could go as low as 1%, government estimates are considerably higher, and the savings banks are now predicting 2% dropping to a bit less than 1% next year and 2009 unemployment rising to 11.3%.

I am guessing that the government doesn't believe their own rhetoric, because their bailout plan is pretty hefty. It is also very like the US plan. 10 billion EU, of which about 6 billion goes to individuals in the form of two 200 EU payments. One of those is in July and another in December. The rest, as explained in Iberian Notes:
The other €4 billion, though, looks like it's mostly free money given out to special interest groups. It will go to 1) aid for small and medium businesses, basically a government subsidy for the petite bourgeoisie 2) guarantees for mortgages on dwellings under "official protection," basically a government subsidy for the banks 3) public works spending, which if done right doesn't have to be a mere government subsidy for the construction industry, but if done wrong will be just that 4) "reordering the energy industry," which sure sounds like a government subsidy for Repsol and the electric and gas utilities 5) paying immigrants to go home, which is of course a government subsidy for said immigrants, and an indirect subsidy for the unions, whose members will face less competition.
So the idea is to stimulate employment, get a lot of immigrants out to cut unemployment, and stave off bank losses by paying off a considerable portions of the mortgage losses. Spain has been running a surplus, but the prediction is that by 2009 they will be in budget deficit.
Spain has a lot of recent immigration, both legal and illegal. They have both been working in construction and buying homes, so I don't see quite how this can work out.

Delinquencies are rising sharply. In February the non-depository rate had increased to 3.257%. The overall rate excluding the non-depositories was 1.056%, the highest since 2002. That is not too good considering that the real slowdown is yet to come; housing construction is supposed to contract over 14% next year.

Inflation-adjusted (real) home prices are now dropping. If you read Spanish and have ever read some of the US housing blogs, the tone of the comments will give you a sense of deja vu. Several of the commenters report hefty discounts by builders.

Of course the pain is not contained to Spain. Bloomberg looks at buy-to-let (speculative) housing in the UK:
Richard Lee spent 5.3 million pounds ($10 million) buying 20 rental homes across the U.K. with just 150,000 pounds of his own money. Today, the properties are worth about 60 percent less and owned by the banks that financed the purchases.
...
Lee, 37, bought an apartment in the City Gate 2 development in Manchester for 239,500 pounds in October 2005. An identical property in the same building sold for 115,000 pounds earlier this year, said Lee, who has surrendered his keys to the bank.
Ouch! I think London is still supposed to be good. The UK budget deficit may become a problem later this year and the next.

Comments:
The "Jade" condo development in oakland ca is being auctioned with minimum bids at 40% of the initial asking price.I find this significant because this development was aimed at both Asian buyers and members of oakland's large and prosperous chinese community.The location is good,and the quality of construction is well above average.However,even at a 60% discount,and assuming a 6% rate,the rents do not justify the asking price...wow.Tom Stone
 
Sometimes reality hurts so bad you think it's a nightmare!

They've got to get move-in buyers. It's hard to know when the rent/buy calculus in large swathes of CA can get back in sync.
 
MoM the adjustment in Ca will be brutal,and I expect a good deal of social unrest.The cheapest 1 BR unit at Jade has a minimum bid of $239,500 with no buyer's premium.And $1,400 a month in rent would be really pushing it,$1,250 is probably a realistic top rent,and you would likely get a higher vacancy factor than I would want.60% off and the numbers don't work even if you assume a zero HOA fee.Wow.
 
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