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First America, now Spain.
It looks like the Spanish may be the first group of Europeans to experience a painful ending to the global property boom.
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Yesterday, the Ibex index in Madrid closed down 2.7% as it was swept by "fears of a property crash," writes Ambrose Evans-Pritchard in The Telegraph this morning.
The wonder is that it has taken investors this long to become nervous
Spanish property stocks saw their share prices plunge yesterday - builders went into "free-fall" while mortgage-exposed banks were also hit hard. Sacyr, the country's biggest property group saw its shares fall 8%, while Banco Santander and BBVA, Spain's biggest banks, both fell nearly 3%.
The fears seem to have spread from the troubles of one fairly obscure Valencia-based builder, Astroc. The group has seen its shares fall by 62% over the past week, after changes to the region's planning laws. But other than this, as Evans-Pritchard puts it, "there appears to be no obvious trigger for the sudden switch from euphoria to panic."
To be fair, Astroc was due a correction - its shares have climbed from e7 to e75 since listing last June, writes Fiona Maharg-Bravo of Breakingviews. And some of the property stocks have been "trading at more than a 20% premium to their net assets value."
And this is at a time when Spanish house price growth is faltering. "House prices are rising at their slowest in almost a decade. In some places, they are falling."
Maharg-Bravo reckons the correction may well continue - though she seems more sanguine about prospects for the broader Spanish property market. "Long term interest rates are still low, employment and wages are still growing, and house prices are still rising by 7% a year, after all."
We're not so sure - and nor is Evans-Pritchard. In fact, the statistics on the Spanish property market should make for, frankly, terrifying reading for anyone who is thinking of, or is already, investing there.
More than 800,000 homes were built last year - that's more than France, Germany and Italy combined, "leaving a glut of property hanging over the market," says Evans-Pritchard. House prices have risen 270% in the past ten years. Household debt has climbed from 75% of disposable income in 1995 to 133% now.
That's all bad enough - but Spain's market is also unusually vulnerable to rising interest rates and panicky speculators. In a country of 40 million people, "some four million foreigners own property."
One of the main reasons that property bulls - and sometimes more sober experts - often claim that house prices won't fall is because if you own a home, and prices are falling, you will tend to hold off selling unless you absolutely have to. So the supply of homes on the market dries up, keeping supply and demand broadly balanced, meaning prices remain roughly stable, until conditions pick up again.
This is debatable on many levels - but let's go with it for now. The problem for a market like Spain is that holiday home owners and fly-to-letters have neither the desire, nor in many cases, the financial reserves to sit on a property that is falling in value. And that's not even considering the number of ex-pats who emigrate, only to turn around and come back within the first few years of moving.
On top of that, many second home-owners are largely relying on money released by remortgaging their main residential property. So with interest rates rising, for example, in the UK, sustaining two homes is becoming more difficult for all those property moguls who have overstretched themselves to buy their place in the sun.
In Spain, the situation with interest rates is even more grim. Because it's part of the eurozone, Spain can't set its own interest rates. And the reality is that eurozone rates are largely set with Germany in mind. The trouble is, Germany has been at pretty much the opposite end of the business cycle from the rest of the world (except maybe Japan) for about ten years now. Rates were very low when Spain joined the euro, which fuelled the boom in the first place - as Bank of Spain governor Miguel Fernandez Ordonez says: "The single monetary policy has meant that excessively loose conditions for our economy have been almost continuous."
But now that Germany is recovering (for more on this, see the cover story in the latest issue of MoneyWeek, out on Friday), eurozone rates are rising rapidly - there have been seven hikes since December 2005, and there's no sign of the European Central Bank stopping. And in Spain, a whopping 96% of mortgages are on floating rates, rather than fixes - so every rise hurts almost every mortgage holder.
Rising interest rates, a hugely overvalued and highly speculative Spanish property market, and massive consumer debt - it doesn't make for a pretty picture. And we're not the only ones who think so.
Bernard Connolly of Banque AIG doesn't pull any punches when he tells The Telegraph: "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. This stock market slide is not just a correction'. It has a very, very long way to go."
Turning to the stock markets
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London's FTSE 100 ended yesterday resolutely in the red, weighed down by directories group Yell which tumbled by over 20%. The index of leading shares fell 50 points to close at 6,429 and the broader indices were also lower. however, life insurer Aviva topped the FTSE leaderboard following an expectation-beating rise in first-quarter sales. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 ended the day 31 points lower, at 5,886, whilst the Frankfurt DAX-30 closed 65 points lower, at 7,270.
Across the Atlantic, US stocks closed mixed as positive results from the likes of IBM were offset by weak economic data. The Dow Jones approached the 13,000 mark in intraday trading - notching up a new record high of 12,989 - but closed just 34 points higher, at 12,953. The Nasdaq rose a fraction of a point to end the day at 2,524. And the S&P 500 fell a fraction of a point to close at 1,480.
In Asia, disappointing earnings from stocks including Nissan and KDDI weighed on the Nikkei 225 which closed 215 points lower, at 17,236. In Hong Kong, the Hang Seng fell 89 points to 20,457.
Crude oil was little changed at $64.59 this morning and Brent spot was 22c higher at $66.93.
Spot gold was trading at $684.00 in London today and silver had slipped to $13.73.
And in London this morning, a group led by Royal Bank of Scotland proposed a 72.2bn euro (approx. £49bn) bid for Dutch bank ABN Amro. The 70 per cent cash and 30 per cent stock deal is intended to trump a rival all-share offer by Barclays which was agreed on Monday. Barclays shares were up by as much as 1.9% in early trading whilst those RBS shares were down 1.5%. In Amsterdam, ABN Amro's stock had climbed by as much as 4.2%.
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