The lesson of Spain’s property bubble

Forget about Malaysia, Hong Kong, Australia, UK, or even US. Europeans are now making their property buying trips to Spain.

Fancy a posh rental apartment in Madrid?

What about a vacation home in Costa del Sol? (It’s the authentic sunny coast south of Spain, not the Singapore sound-alike, ok?)

Why not? Prices have been slaughtered to 70 percent discount off their peak in 2008 — a bargain even to the most value-conscious investor.

Local banks are ready to offer mortgages with high loan-to-value ratio. Buyers can borrow up to 90 percent of the purchase price, coupled with very low monthly repayment for a 40 to 50-year mortgage.

No?

Do you know that Spain was once a prominent nation in Europe?

With booming tourism and agriculture industries, the rapid economic growth of the country was a ‘Spanish miracle’ in the eyes of Europeans. Spain’s per capita income is above the average of other EU countries. In 2008, its €1 trillion economy is the 5th largest in Europe and 12th largest in the world.

So what happens to the Spain success story?

Remember back in the early 2000s, when Spain joined the EU and converted its currency to euro, it started lowering the country’s interest rates.

With the availability of historically low-interest housing loans, properties became very attractive. Local banks were willing to lend money to any property developer or buyer.

With ready loans, many young people left their parents’ home to buy their own place. That was the kick start of the property bubble.

It was not just the locals. Foreign investors also found Spain a property paradise.

From 2000 to 2008, foreigners and their investment funds flocked to Spain. In the same period, the Spanish population rises from 40 million to 47 million, an astonishing 17.5% increase in total population.

Daniel Talavera, a Spanish journalist and property investor himself, described what buyers experienced at that time,

“… it was very difficult to bargain on price, since the market trend was ever-increasing price rises — ‘if you do not buy now, in 3 – 6 months, the price will be 5% – 8% higher, or even 10% more expensive …’ That was the belief, and so any asking price was accepted.”

From 2000 to right before the crash in 2008, property prices snowballs to almost 2.5 times (Property Price Index rises from 150 to 375).

Not long ago, between 1985 and 1991, housing prices nearly tripled. History is repeating itself again!

(Low interest rate, long-period housing loans, population growth, foreigners, foreign funds, historical high prices … do these phrases sound familiar to you?)

The speculative real estate market was so lucrative that young people all jumped on the bandwagon. Many simply dropped out of schools to find work in the property market.

That explained why youth unemployment shoots up to 51 percent when the property bubble pops. The latest overall unemployment of the country now stands at 24 percent.

When the economy tumbles, both foreigners and Spanish citizens leave in droves to find employment in other countries. For just the first half of this year, 228,890 foreigners and 40,625 citizens left Spain in a short 6-month period.

Between 2nd quarter of 2011 and 2nd quarter of 2012, in just one year’s time, property prices in Spain have fallen 11.5 percent. Barcelona alone sees property prices drop 40 percent since the sub-prime crisis. Prices have actually gone back to the 2003 level.

Unfortunately, foreclosures in Spain are accounted for only 60 percent of the housing loan. That means, even after being evicted by their banks, many people are still liable to the debts of their previous homes they no longer own.

With two million vacant homes and countless ‘ghost towns’ across the country, the Spanish property market is far from bottoming out.

So, a luxurious villa in Spain for retirement, anyone?