The insanity of European property markets
- Thread starter Ghost of Cutten
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GOC, if I may offer my view - without you getting upset, I hope
1) Yes, prices should be way lower, if adjusted to the historical average salary/average house price ratio, probably about 60% lower. However, in Spain, you and your spouse answer for your mortgage with all present <i>and future</i> property and income. If you add to that the fact that over the last 10 years most mortgages granted to "young" couples (<40 years old) included the parents of <i>both</i> spouses as cosigners, that basically guarantees the banks that if the signers default, the bank will recoup its money even if in some cases it takes them some time. Most (not all) houses that have been foreclosed were sold to immigrants that when they could not afford to make the payments, simply went back to their countries of origin - and now owe to the banks more than the houses were worth <i>when they bought them</i>. Most Spaniards will go to any length before defaulting on their mortgages - and that includes not selling at a price that doesn't allow them to pay off their mortgages. You wouldn't believe the amount of married 30-year-olds that have gone back to living with their parents (he with his, she with hers, their children taking turns).
2) Yes, banks have been repossessing en masse <i>unsold properties<u> from delinquent developers</u></i> (that, unlike individuals/families, have limited liability), plus the houses foreclosed on immigrants and a very few Spaniards. They couldn't hold them in their balances for both legal and economic reasons, so what did they do? They talked to the government, who changed the law (so they could keep them in their balances with mark-to-fantasy values) and gave them billions (paid for by the people with their houses under water). Former Economy Ministry Rodrigo Rato, who pumped and pumped the housing bubble, is now the President of one of these banks and the first thing he did when appointed was to ask for more taxpayer's money to cover his bank's losses in those RE portfolios that "could only go up". Starting next year, banks have to start marking their RE properties to market, but don't you worry too much: the government will change the law again (banks fund political parties campaigns and, later, write down the debt).
In the post-92 crisis Spain had a similar RE bubble and yet, with highly inflated house values, over 20% unemployment, low wages and 14% interest rates, house values didn't collapse, they corrected in inflation-adjusted prices, over time and with a hiss, not a pop. That's more likely the scenario here: a decade of stagnating prices.
(I'm referring all the time to residential homes; vacation properties on the coast are a different matter - those have popped).
Good posts GoC,
Currently I'm based in Latvia, Riga, and as a norwegian I'm almost shocked by the demanding price on real estate here. As far as I can see the prices are the same as in Sweden. In Norway, where I'm from, real estate is a bargain in relative terms with at lest 5x times income compared to Latvia. It's beyond me how anyone from middle class and downwards can afford anything here. Whereever I go I see empty buildings recently built (last 5 years). Last year the population diminished 1% due to emigration. As far as I can see, the prices must fall much more or income rise, which seems unlikely right now.
Currently I'm based in Latvia, Riga, and as a norwegian I'm almost shocked by the demanding price on real estate here. As far as I can see the prices are the same as in Sweden. In Norway, where I'm from, real estate is a bargain in relative terms with at lest 5x times income compared to Latvia. It's beyond me how anyone from middle class and downwards can afford anything here. Whereever I go I see empty buildings recently built (last 5 years). Last year the population diminished 1% due to emigration. As far as I can see, the prices must fall much more or income rise, which seems unlikely right now.
http://www.kyero.com/property/1287725-country-house-for-sale-huercal-overa
55k euros for a 4 bedroom 2 bath 2000 sq ft house with a pool. Not very insane if you ask me.
55k euros for a 4 bedroom 2 bath 2000 sq ft house with a pool. Not very insane if you ask me.
Quote from Picaso:
GOC, if I may offer my view - without you getting upset, I hope
1) Yes, prices should be way lower, if adjusted to the historical average salary/average house price ratio, probably about 60% lower. However, in Spain, you and your spouse answer for your mortgage with all present <i>and future</i> property and income. If you add to that the fact that over the last 10 years most mortgages granted to "young" couples (<40 years old) included the parents of <i>both</i> spouses as cosigners, that basically guarantees the banks that if the signers default, the bank will recoup its money even if in some cases it takes them some time. Most (not all) houses that have been foreclosed were sold to immigrants that when they could not afford to make the payments, simply went back to their countries of origin - and now owe to the banks more than the houses were worth <i>when they bought them</i>. Most Spaniards will go to any length before defaulting on their mortgages - and that includes not selling at a price that doesn't allow them to pay off their mortgages. You wouldn't believe the amount of married 30-year-olds that have gone back to living with their parents (he with his, she with hers, their children taking turns).
2) Yes, banks have been repossessing en masse <i>unsold properties<u> from delinquent developers</u></i> (that, unlike individuals/families, have limited liability), plus the houses foreclosed on immigrants and a very few Spaniards. They couldn't hold them in their balances for both legal and economic reasons, so what did they do? They talked to the government, who changed the law (so they could keep them in their balances with mark-to-fantasy values) and gave them billions (paid for by the people with their houses under water). Former Economy Ministry Rodrigo Rato, who pumped and pumped the housing bubble, is now the President of one of these banks and the first thing he did when appointed was to ask for more taxpayer's money to cover his bank's losses in those RE portfolios that "could only go up". Starting next year, banks have to start marking their RE properties to market, but don't you worry too much: the government will change the law again (banks fund political parties campaigns and, later, write down the debt).
In the post-92 crisis Spain had a similar RE bubble and yet, with highly inflated house values, over 20% unemployment, low wages and 14% interest rates, house values didn't collapse, they corrected in inflation-adjusted prices, over time and with a hiss, not a pop. That's more likely the scenario here: a decade of stagnating prices.
(I'm referring all the time to residential homes; vacation properties on the coast are a different matter - those have popped).
Well there are some core differences here. We have a single currency, so devaluation is not an option - in the early 90s, devaluation was what eventually happened to allow the economy to adjust. With no devaluation, the adjustment has to come either via high inflation, or asset price falls. Now, with a single central bank in the Eurozone, with a pure inflation-fighting mandate, how likely is it to be the inflationary outcome? So we are left with only one - price falls.
As for the banks getting continued bailouts, there is a critical flaw with this policy - the governments themselves are under threat of insolvency. How can the Greek government, paying 11% (and rising) per annum on its debt, afford *more* bank bailouts? The bonds are already priced for probable partial default - they simply do not have the cash to bail out the banks any further. Now, Spain is not (yet) as stretched as Greece, but it eventually will be stretched, especially once the markets start demanding a higher risk premium to own Spanish debt due to defaults in Ireland and Greece. Can you imagine what will happen in Spain when the government is paying 10%, 15%, 20% on bond interest, at the same time as cutting social services and the wages of doctors, teachers, nurses, police, all the while the banks are chasing parents and grandparents for 100k+ in debt repayments because of their defaulting children, and then a tiny elite of bankers and politicians announces a multi-billion Euro bank bailout for a few rich businessmen?
There is only so far that the establishment can exploit the general public. They may ignorant on economic affairs, but they are not THAT stupid and apathetic to just let this kind of blatant exploitation and robbery happen without a reaction. Bankers and politicians are already public hate figures, it would only take a little bit more political insensitivity for them to start getting hung from lamp posts. There is a limit to everything, beyond which the system starts pushing back, and the greed and exploitation of the crony capitalist establishment is not exempt from that rule.
"A lovely old 4 bedroom cortijo with main road access, and a pretty garden in a tranquil setting with stunning views, in a very, very remote area"
You seem to have misread the thread title. It wasn't "the insane overvaluation of one house in an extremely remote part of Spain". It was about the gross overvaluation of numerous property *markets* across Europe. I.e. millions of buildings, mostly in large urban metropolitan areas. Not one guys fixer-upper shack in the Spanish equivalent of outer Alaska.
In 2007 you could buy houses in Detroit for $5000. I guess you were posting back then, telling us the overall US housing market was cheap and a great dip to buy?
Last time I checked household debt to income in Norway was close to 200% compared to "only" 120% in the US, hard to say whats sustainable and whats not.
Where the British goivenrment intervenes in property market is interest rates. If the BoE rate was raised to 2005 level, a typical monthly mortgage paiment would double. This would be a massive hit for people who resently baught a home they can barely afford as it is.
UK Government also holds majority steak in 2 largest mortgage lenders in the country. This gives the Government plenty of control over the conditions of repossessions (like people who are half a year back on their mortgage may be given a payment holiday instead of a repossession order).
Onother interesting point is the appreciation of the property market as a whole makes about 60% of GDP between 1970 and 2010. Given most homes change hands from time to time this hints that a huge part of consumer spending over this period was financed via property appreciation. (People either sold tehir houses at a premium or remortgaged to "take equity" out of a home.)
That's simply nonsensical - something cannot by definition be relatively expensive for hundreds of years, because relative expensiveness is in relation to its average historical valuation metrics and fundamentals. And average cannot possibly be far from the mean on average, it's a mathematical impossibility.
My claim is pretty clear, if you read my post and don't make silly assumptions based on things I never said in the first place - prices are way above the average, and fundamentals are way below the average. Therefore prices ought to be trading below average historical valuation metrics, not way above them.
If you have traded for a while, you will know that valuation disparities like this are pretty common and can persist for some time. Usually it takes some kind of catalyst based on imminent deterioration of the fundamentals, in order to trigger major price declines. For example, the pound was obviously hugely overvalued at 2 to the dollar back in 2007 and 2008. It took a while to collapse, but eventually it did, once the fundamental outlook started to sour and the BoE slashed rates from over 5% to 0.5%. To me, the PIGS markets look to be in a similar, if not worse situation, and the catalysts are drawing closer.
sounds really similar to daughter country australia. One can assume same receipe used. And same scenario unfolding ?
here is couple more ways how govt manipulates property market:
-turning renting appartments to serviced appartmets - hotel room basicacally including deep suburbia, which are empty most of the time but help keeping upward pressure on rents. presume owners of these serviced appermets get some kind of assistance to compensate from govt. least amount of stimulus has largest effect. people more pressured to buy.
-buying houses by superfunds and leaving houses empty. there is apparently 850K empty dwellings in AU on 20M people.
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