The dive was precipitated last week when Valencian builder Astroc’s shares fell by 62 per cent after planning laws were changed. Since then panic has spread causing the Madrid Bourse (Spain’s Stock Exchange) to topple. Manuel Romera, Director of Madrid’s Institute of Industry said, “I can see a mortgage crisis building. We have a serious property bubble in this country and everyone is in denial; it’s worse than the US”.
Dismay has also set into the banks that have been key investors in the market. The banks have been buoying the market by granting easy access to mortgages and loans. Both Banco Sabadell and BankInter both lost 5 percent of their value on Monday as part of the ongoing nightmare.
Low interest rates that have been repeatedly set by the European banks have provided fuel for a housing boom which has operated in Spain almost free from constraints since the Euro arrived in Spain in 1999. Miguel Fernandez Ordonez, Governor of the Bank of Spain said, “The single monetry policy has meant that excessively loose conditions for our economy have been almost continuous. A less relaxed tone would have been better for our needs.”
The economy of Spain is now so seriously distorted towards the property market that some observers have now predicted an imminent collapse. If this occurs it will have a knock-on effect to the rest of the economy.
Last year alone over 800,000 homes were built in Spain beating the productivity in the housing sector for every other European country; yet the population of Spain still remains below 41 million. There are over 4 million overseas owners of property in Spain.
The boom has been partially created from within Spain with many Spaniards hurrying to jump on the property investment ladder. Many Spaniards own more than three houses and remain ‘sitting’ until a buyer can be found. This has fuelled demand for new housing for a younger generation of would-be investors. With few restrictions in planning and national capital growth little thought has been put into the lack of available end buyers at the top of the pyramid. Homes now owned by investors are now seen as a long term option.
Murcia, with presently one of the highest rates of new development may be one of the hardest hit by the recession as a glut of unwanted property comes on the market.
Bernard Connelly, Global Strategist for Banque AIG and former head of economic research for the European Commission said, “Spain is going to face the very direst of economic circumstances: a cycle of recession, deflation and widespread private sector default – a depression in fact.
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