March 9, 2006
The current causes of "Investor Fatigue in Spanish Property"
The property investment frenzy of the late 1990's and early 2000's in Spain is a momentous example of a sound principal grievously misapplied. The forces that drove the boom had more to do with the psychology of human nature than sound, rational economic argument.
The current causes of "Investor Fatigue in Spanish Property"
Problems faced by the Costa del Sol property market:This will cause a drop in the family income on the marginal buyers (the majority of first time buyers or buyers who required over extended credit lines to afford the property) as well as a double inflationary effect (with the value of money decreasing it is better to hold onto tangible assets e.g. property). These combined impacts will lead to stagnation in certain segments of the market place and in turn will lead to greater levels of pessimism and falling investor confidence.
Can the new build frenzy continue
Despite the hgih number of housing starts The long term picture for the new build market in Spain is not good. Prices for commodities have bottomed out so scarcity of raw materials and buildable (desirable) land has more effect on prices than the unit cost of labor, this coupled with: 1. Increasing building regulations and standards 2. Increasing fiscal and anti corruption regulation 3. Increasing government and regional government pressure to curb illegal building 4. Pursuance of a policy to help sustain the environment 5. Increasing regulation of the rental industrycould result in a severe price inflation for costs of building new property.
In Marbella there has been an increase in the ratio in the sale of resales to new build properties, and a significant drop in the rental return achievable in certain segments of the market. We envisage similar scenarios begining to play out in other resort areas around Spain, in an increasingly exaggerated manner over 2007 and 2008.
What is a good property investment
Before the boom there were basic principals of investment to help guide the selection for a good property investment (e.g. rental return, comparative square meter analysis, ROI calculations). A good investment is buying a share/bond/property at a price that underestimates its real or current value or the return that it will generate in the future. This form of conservative, diversified investment based on careful evaluation of good clear analysis of the ROI will only be possible in property only once the speculative herding instincts of human nature focus on the next 'opportunity' and the market has undergone a period of recovery.Some relevant quotes for you to think about
"This market cannot price out newcomers indefinitely, if only because the Grim Reaper will inevitably increase supply. In order to bring demand back into line with supply, prices must fall. Sadly, the biggest losers will be youngsters who buy for the first time just before the market corrects. Just like last time." - Ian Cowie, Telegraph 28/1/06“In times of extreme duress markets can seize up, liquidity can dry up, and panic can overwhelm the whole financial system. When crisis erupts, investors eject out of every market with alarming speed. They abandon exotic or emerging markets and run from risk wherever it lurks. Like a fire in a movie theatre, everyone runs for the exits simultaneously. When everyone is selling at the same time, sellers can overwhelm the markets. When a firm has to sell in a market that has been seized by panic, there are no buyers. When there are more sellers than buyers, market prices plunge to extreme lows - far below what investors ever anticipated.” - Common stocks, uncommon profits
“Mr. King is nervous that homeowners may not realise that although low interest rates make mortgage repayments affordable, high inflation will not erode the value of their borrowing, as it did in the 1970s - and when they do catch on, house prices will plunge.” (Early 2003 comment)
June 22 (Bloomberg) -- For the past year, the favorite metaphor of central bankers and economists who follow the U.K.'s fevered housing market has been the ``soft landing.'' It is a nice phrase, conjuring up an image of a plane coming gently onto the runway, before everyone happily disembarks. Now it is replaced by grimmer aeronautical metaphors: storms, turbulence, and even crash.
Category: The Great Housing Debate