Economic Crisis in Spain: The Story of the Popping Housing Bubble
The 2007 economic crisis is no secret for anyone anymore. As you probably know, the real estate sector has been victim of its own success and resulted in finding itself stuck in a bubble of speculation that ultimately burst and brought the whole world’s economy to its knees. Many parties were responsible for the disaster, including governments, media, property owners and most of all the banks.
Housing Bubble crash: How and Why?
In Spain, the housing bubble started cracking and the prices falling in 2007 after the government, through its 1998 “Ley del Suelo” (Law on Ground) allowed the land market to be privatised and thus sold to be built on. By 2005, the construction plan went a little crazy when Spain found its building rate surpassed those of France, Germany and Italy put together. The plan was to increase the offer in the real estate sector by booming the number of investments and therefore allow the Spanish youth to access ownership easily and for a fair price as the cost was supposed to be lowered significantly thanks to a large offer.
Between 1998 and 2002, everything seemed perfect and the Ley del Suelo seemed very effective, boosting the construction sector to a whole new level. Indeed, it has been so stimulated that it offered many young working people as well as immigrants jobs for all. As a result, Spain unemployment dropped to an all-time low – 9,2% in 2005 compared to 22,9% in 1995 – and the country’s GDP kept on growing every year. With the help of media advertising on how Spain is the perfect place to access ownership or buy a secondary residence for foreign investors, the building market was going great.
Unfortunately, the Ley was a complete travesty as the demand for housing skyrocketed, outdistancing the offer and increasing the housing cost drastically – from €915/m2 in 1990 to €1,667/m2 in 2002, reaching €2,516/m2 in 2005. Moreover, the average wage did not increase accordingly and Spaniards found themselves even more unable to buy accommodations as their salaries did not increase simultaneously with the housing prices, which had at this point doubled.
That’s when the banks came in and offered extremely attractive mortgages for people. In other words, you could get a credit and have 40 to 50 years to repay for it, what a win. They were giving mortgages often for up to 110-120% of the sale price. Once again, with the help of the media and the politics of course, the idea that the housing market was so good and so profitable led everyone to think that housing prices would never fall and that it was the best investment possible. That is why the banks gave debt so easily while the housing prices increased steadily until 2007. As a consequence, Spaniards had to take on about 40 years of debt just to buy a modest property.
When the whole financial system exploded, due mostly to the fact that most wealth created by Spain came from debt, the country and its people suddenly found out that the situation was dire and that pretty much every one was broke. In other words, the real estate sector crashed and no one was willing to invest in it anymore. Also, after prices started falling, there were thousands of people paying now ridiculous mortgage payments for properties that all of a sudden had lost a lot of their value.
Housing Bubble: Spain is Recovering
But the good news is, after a dramatic period, everything seems to have very slowly gotten a bit better because even though the housing prices in Spain have kept decreasing since 2008, they appear to be falling more slowly each year. Rumour has it, and by that I mean the experts of some remarkable institutions such as the Societe Generale bank or the Instituto Nacional de Estadestica (INE), that the housing market is forecasted to improve by 2016. In fact, although prices are dropping on a national scale, it is not the case in every part of Spain. Some of them are actually experiencing some improvements such as the metropolitan areas, the big cities and the Mediterranean coast – basically the housing market is improving in Barcelona! Plus, it has to be noted that foreign investments are largely coming back to Spain and are sustaining the market greatly, especially those from other European countries such as the UK, Sweden, Germany and France. For more information about this, check out this article from spanishpropertyinsight.com according to an article from the Spanish newspaper El Mundo.
Lucy Culpepper, editor for overseaspropertyalert.com, writes “According to the latest price index from the Registradores de la Propiedad (Association of Registrars), property prices in Spain rose almost 1% in Q2 2014 compared to the same quarter in 2013. This is the first time that prices have risen in six years”. And she adds that in 2014 the statistics proved those predictions on Spain’s housing market recovery :
“And for the first time in years, we’ve got collaborating statistics attesting to the market turnaround.
- At the beginning of September, the National Institute of Statistics published its Housing Price Index for the whole of Spain, indicating a rise of 0.8% in Q2 2014—the first increase since the property crisis kicked off in 2008.
- In the same report, prices of new homes rose by 1.9% compared to the previous quarter.
- Out of the 19 autonomous regions in Spain, 14 showed an increase, according to the Housing Price Index, with Catalonia (where Barcelona is located) rising by 1.8%.
- The latest data (released Sept. 26) from the Ministry of Development (Moncloa) show that property sales for the whole country rose by 12% in the second quarter of this year. And Barcelona city registered an annual increase in property sales of an amazing 23% year over year through July 2014. (That’s property sales, not property prices.)”
You can find this very interesting article on overseaspropertyalert.com. Signs seem to point out that Spain is on a good path to recover from its wounds but it appears to being happening faster in regions such as Catalonia and cities like Barcelona according to last year’s figures. Just like Culpepper says in her article, now is a good time to buy in Barcelona!
As so, everything is not lost yet! The Spanish housing market has suffered greatly from the 2008 economic crisis which hit it and crushed the bubble of speculation the country had created for itself. Seven years have passed and Spain’s real estate sector is slowly recovering from the crash and already shows some signs of improvement. Do not despair readers, everything is getting better!
If you want more information about the economic crisis in Spain and the reasons that led the country to its demise please check out this amazing satirical and funny video clip from the comic drawer Aleix Salo that will make you understand pretty much everything in a really short time. Plus, it is only available in Spanish so that you can practice your language skills!
For more information on the recovering of Spain, do not hesitate to read this article from glogbalpropertyguide.com which is extremely detailed, perfect for the economics freaks like me!
And if you’re looking to buy a property in Barcelona don’t hesitate to contact us!