Will the Spanish real estate sector become Spain’s growth engine again?

14 September, 2011 No Comments

If we compare the current market situation with the last real estate crisis to see whether the outcome is going to be similar to that of years ago, they only resemble in the drop on sales.

* The crisis that I mentioned in the paragraph above is the one that we experienced in 1990 prompted by a mere increase in home prices. The direct consequence of price increases and speculation was a housing bubble. The situation the market reflected was a big supply of finished homes that investors were buying only to speculate, hoping for prices to increase to then sell a few months later. Since the market could not keep up with this rhythm, the market shut down;  sales went down BUT, banks did not stop financing as it happened in the 2008 crisis.
** In the current situation, the market problem has its origins both in the financial sector as well as in the real estate sector, and we see that:

1- Promoters built in places where there was no demand prior to construction, and hoped that demand would rise only because there were properties for sale. It was never taken into account that a family home must be close to the workplace, with services, equipment, communications network …. which are crucial aspects in the decision process. The result was nothing else than ghost towns and overpriced land. Now, land is what weights more in the bank’s balance sheets rather than homes of defaulted customers.

2 – Reference has been made about the quantity of unsold homes within the banks’ portfolios. Perhaps this is not the primary concern because homes will eventually be sold since the need to buy homes still exists. This need is not reflected in the market (demand) because financial institutions are not lending money. Banks are granting mortgages only to clients that are interested in assets within the bank’s real estate portfolio, but other assets such as land remain stuck in their portfolios. The reason is that nobody is going to build any time soon until banks get rid of all their stock, then demand for construction will rise and thus the value of land.

Following the pressure from the Bank of Spain 6 months ago, “Cajas de ahorro” presented the data regarding their real estate properties, highlighting the amount of soil that they had to take, which part of it corresponded to undevelopable land.

3-In regards to particular investors interested in purchasing a home, I can tell you that many visits to properties take place, although in most cases do not go further. This is a consequence of the high percentage of customers that their bank has denied the mortgage.

This has transformed the rental market into a safe haven. In a country where in recent years the purchase of a home was THE common transaction (justified on the notion that it was better to make a payment to the bank, which in the long run created wealth, rather than paying a monthly rent to a landlord), we have found ourselves in a larger and more expensive rental market. It is important to mention that rental prices have somewhat stabilized. A monthly rent is similar to paying a mortgage payment, and those who bought a property with a mortgage found themselves that their only option was to rent. In the meantime, however, the possibility to rent a property with a purchase option has become quite popular and gives more incentive to people.

In the normal course of free market, the supply of a product suits to the demand, but the current situation has forced demand to fit supply, changing the concept of seller by landlord.

4 – We should not forget that being part of a global economy, could mean that a simple cold in America or Asia, may translate into a pneumonia in Europe.

Given this situation we can arrive to the conclusion that the Spanish economy will not reactivate until the real estate market reactivates ….. because this sector, with all its ups and downs, has been the growth engine in the last couple of decades (along with tourism and services). I believe the necessary measures need to focus on generating liquidity to the financial system to speed up the recovery process, although it is most likely that we will not go back to the figures of recent years …… at least not in the short term.

Future real estate bubble in China?

21 May, 2010 No Comments

This year 2010 is very complicated for the Chinese economy, due to issues related to the appreciation of the Yuan, inflation and the growth of house prices , as discussed in the article on BBC news.

To stop the current speculation in the Chinese real estate sector, the Government has taken several measures to avoid the rise in housing prices, including:

• Increase the first payment from buyers of second homes to a minimum of 50%.
• The State Council called on banks to stop lending money to buyers of residential properties for third properties and do not grant loans to buyers who do not show evidence of at least 1 year of residence in China.
• Increase the provision of land for development.
• Strengthen controls on financing real estate companies.
• Instruct the developers to not monopolize properties in order to drive up prices (Beijing has been limited to a purchase of new construction homes to its residents).

Given these measures to suppress the increases in housing prices,some investors are rushing to sell their property while prices remain high. Many real estate speculators who invested in Shanghai and Beijing began to sell their homes since March 2010, so that the number of properties for sale increased significantly.

Today, although China’s society is very conservative, have also introduced measures to regulate the granting of mortgages, because the new generation, western-minded, have no problem asking credit cards and mortgages (previous generations requested financial support to the family and there was not much demand for banking products).

Another issue that has helped the growth of demand and therefore prices to remain higher, is that Chinese society in matters of family is very traditional and many marriages can not be held if the couple has no home ownership . This has led to the problem of the relationship between salaries and house prices in major cities is increasing. The solution given by government is to create public housing parks to facilitate access to citizens with lower purchasing power.