Spain, pain, Spain, pain and the saga goes on. Below some “spot on” points by Blackrock.
- Spain brings European sovereign risk back in focus: European risk again dominates the outlook for global financial markets. Whether policy makers have learned the critical lessons of past mistakes in Greece will determine the near-term outlook.
- One part Ireland… and one part Greece. Spain’s economic problems bear both resemblance and critical differences to aspects present in both prior crises in Ireland and Greece.
- The pain in Spain falls mainly on…Germany. The lesson of the failures of the Greek intervention at its core was to fail to recognize that Greece’s problems were not limited to Greece.
Property collapse in Spain has only begun…Must read by Voxeu on the Spanish housing crisis.
What is the problem in Spain? It started with a classic housing bubble financed by foreign capital, and as a textbook would predict, once the inflow of foreign capital stopped and the bubble burst, unemployment soared and the financial system went bust as well (Reinhart 2008).
The current fiscal problems mostly reflect the housing bust. The Spanish government is running a large fiscal deficit as the economy remains weak and the ever-increasing losses in the banking sector hang like a sword of Damocles over the public sector.
On this ground, too much attention has thus been focused recently on the Spanish deficit overshoot in 2011 and what deficit might be attainable in 2012. More attention should be focused on the factors behind the deficit. We argue that the root problem is that the Spanish housing bubble was extreme and that the adjustment has simply been too slow. In particular, we provide a novel angle on two key questions: how long it will take to absorb the legacy of the bubble and how much it will cost?
Here is the latest on the falling Spanish properties market. From IMIE’s latest March report.
The General IMIE Index recorded the highest year-on-year decrease in the historical series during the month of March, with a drop of 11.5%, leaving the index at 1631 points. Since peaking in December 2007, house prices have seen a fall in value that now stands at a cumulative figure of exactly 28.6%.
|Capitals and Major Cities||1925||1683||-12,6%|
|Balearic and Canary Islands||1576||1423||-9,8%|
With regard to the performance of the different market segments, “Capitals and Major Cities” once again recorded the steepest decline of 12.6% in March, followed on this occasion by the “Other Municipalities” with a fall of 12% compared with the same month last year. In both cases the reduction exceeded the market average.
Spain is reaching that “when it rains…” moment. Unemployment is taking out new highs, PMI is falling off the cliff, the new PMs honeymoon is over and the property collapse is about to happen. Prices have come off from their highs, but it is not until this year we can expect the real downturn as the banks are forced to start hitting the market with their inventories of empty properties. If you think the US had a bubble, Spain is much worse. The big elephant in the European room is in motion. From Bloomberg.
Spanish home prices are poised to fall the most on record this year, leaving one in four homeowners owing more than their properties are worth, as the government forces banks to sell real-estate holdings.
Home prices will decline 12 percent to 14 percent, according to research and advisory company R.R. de Acuna & Asociados, after Economy Minister Luis de Guindos in February gave lenders two years to make 50 billion euros ($67 billion) of additional provisions and capital charges for losses linked to real estate. That’s the most since the National Statistics Institute started tracking values in 2007. Standard & Poor’s forecasts borrowers with negative equity may rise to 25 percent this year from 8 percent in 2010, based on an analysis of 800,000 mortgages.
As our readers know, The Trader has been very negative on the Spanish Economy and the Spanish markets. The focus seems to be shifting towards the Iberian Peninsula in an intensive fashion over the past days. Monti is out talking negatively of Spain, as well as other Eurocrats. The huge problems Spain is facing are probably too big to quick fix. The unemployment is a structural issue and will take many years to fix. The property sector, bottoming out by many pundits, creating great value buys for the cash rich investor, is a total fallacy according to us. The sector has come down, but the big sell off is still to come. There are simply way too many empty properties, not attracting buyers. These prices will need to change drastically, in order to start attracting real buyers. Many homeowners are not willing to realize that the Spanish property market will start selling under construction cost. Buying land and putting a house on it, won’t trade at a net premium, but on the contrary, will trade at discount. This is taking private owners time to realize, just as the banks are finding it hard to realize, their stock of unsold homes, is not worth where they “think” it is. Latest on the Spanish mortgages, from El Pais (via Google).
The number of home mortgages fell 41.3% in January to reach 29,167, according to data released this morning by the National Institute of Statistics. Thus, the amount of 21 months mortgaged leads downwards.The decline experienced in January was more pronounced than that of December, when the number dropped by 32%.
The average mortgage in January reached the 107,217 euros, 9.5% less than the same month last year, while the borrowed capital was reduced by 46.9% to 3,127,000. Year despite the drop in rate compared to December rose 18.5%, from 24,610 till 29,167.
As The Trader wrote about on Thursday, the latest out of Spain is the accelerating fall in property prices. With every politician, banker and speculator in Spain waiting for the market to turn higher, and all problems will be solved, this is another blow to their expectations/business model. Some more color on the subject, that will get more attention shortly, as Spain is hard to bail out given the size of the economy. From Acting Man.
It is well known that Spain’s economy is in a depression, and we do not use this term lightly. With the official unemployment rate at about 23% and youth unemployment close to 50% it is not an exaggeration to speak of a depression. The probability of social upheaval erupting with greater frequency is extremely high. We already noted that the general strike recently called for by Spain’s unions is only the fifth since the end of the Franco regime in 1975. It is a rare event in Spain and underscores the decline in the social mood and the growing desperation. Those who still have work want to protect their privileges and use the unemployed as their political weapon.
Finally reality is knocking on the door. The Teflon market, churning higher on no volume, is taking a pause. The no volume, low volatility market has attracted many new “smart” and confident longs. Even Bank of Israel is now engaged in trading Apple (according to ZH).
The markets have shown signs of “strange” behavior lately. The “secret” GLD and SLV seller surprised many when hammering the metals last week. Yesterday’s mini flash crash in Apple, has suddenly reversed investor sentiment across the markets. Meanwhile, the credit markets have continued underperforming.
People still talk about Greece (and about Alex Hope, the FX trader), but the elephant in the room, Spain, is still neglected given the size of the potential problems arising in Spain. Remember how it all started in Greece? Yes, Spain is following the same path. Having spent another 90 billion Euros more (that it doesn’t have) than projected in 2011, things will start heating up in Spain. With unemployment sky rocketing, the property bubble about to implode for the second time, Spain does not need a credibility problem. Espana, everything under the sun. More on the Spanish Economy and the (in)famous ghost towns of Spain below;
Spain is now joining many of the weakest Economies of the World when it comes to unemployment. The Trader has written extensively on the problems Spain is facing. One of the largest problems, despite hidden debt, collapsing properties etc is the huge unemployment, still climbing. Many still agree that Spain is not in that bad shape, yet. What if the recession starts hitting Spain for real? Where will unemployment go to next? The most scary part of the unemployment is the big youth unemployment, now just having broken 50%! Spain is now facing a “lost generation”. Motivating these people into getting a job will be very hard. Even if Spain manages reducing the youth unemployment by half, it would still be 25! Youths of Spain are in some big Pain. From RTE.
Official figures show that Spain’s jobless rate shot up to 22.85% at the end of 2011, the highest rate in the industrialised world.
The number of unemployed burst through the five-million mark, surging 295,300 to 5.27 million in the last quarter of 2011, the National Statistics Institute report showed.
As a result, the jobless rate at the end of 2011 surged to a near 17-year record, rising from 21.52% in the previous quarter.
So the property sector in many of the PIIGS countries is under severe stress, but how are property proces actually behaving? Ireland, one of the ex Tiger economies is experiencing the sharpest drops ever. With properties in free fall mood, asking prices fell by 7.7% in the fourth quarter alone. Many are now entering negative equity, and we all know what that means. The hang over period has just started. From Finfacts Ireland:
Asking prices for Irish residential property across Ireland fell by an average of 7.7% in the fourth quarter – - between September and December – - according to the 2011 In Review report published by property website Daft.ie. This is the sharpest three-month fall in house prices to date and means that the percentage fall in prices over the course of 2011 was 18%, as large the fall seen in 2009. The average asking price is now just over €175,000, 52% below the 2007 peak of €366,000.