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Panic selling of real estate stocks on the Madrid stock exchange on April 24 may signal the bursting of Spain’s 10-year property bubble, with construction firms, banks and the nation’s heavily indebted property owners likely to suffer.
The Spanish government, the central bank and many independent analysts had been repeatedly arguing in recent weeks that Spain’s property market is on track for a soft landing after prices grew by 7 percent in the first quarter – the slowest pace in eight years. None, however, had expected the value of real estate firms (the share price of several dropped by more than 10% in a few hours) to take such a hit on the market – a sign, according to some analysts, that the market in general is moving into a prolonged and possibly sharp downturn.
A steep correction in the value of real estate companies and – by extension - the properties they own would inevitably have a dire impact on the Spanish economy after 14 years of buoyant growth, much of it fuelled by a prolonged boom in construction. The industry now accounts for 16 percent of GDP, twice the average for euro-zone countries. More troubling still for the Spanish economy is the fact that the sell-off not only affected real estate firms and constructors, but also related industries such as banking. Spaniards are currently more heavily in debt than at anytime in the past. The total value of outstanding mortgages and loans surpassed GDP last year and a seemingly inevitable correction in house prices – equity from which has fuelled consumer spending - combined with the effect of recent interest rate hikes would likely send the economy into recession.
Playing dangerous games with supply and demand
For several years, Spain has annually been building more houses than France, Germany, Belgium, Holland and Luxemburg put together, creating a massive surplus of property that has been withheld from the market by developers in order to sustain prices. One report estimates that a third of the 800,000 homes built in Spain each year are unneeded, with real demand – much of it driven by immigration and investors – at around 500,000 units.
Spain is an extreme case, but after the recent subprime lending crisis in the United States, a downturn in the Spanish property sector could have a knock-on effect in other markets that have seen dramatic – and unwarranted – increases in house prices in recent years.
Indeed, if Spanish real estate firms find themselves in crisis and the country’s massive stock of surplus property finds its way onto the market, the sound of the bubble popping will be audible in every overheated real estate market around the world.
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